The Effect of the Environment on Profit Efficiency of Bank Branches (original) (raw)

The paper gives an extensive overview of the empirical literature on the effects of consolidation in the financial sector. Up to the summer of 2007, the global financial system experienced a strong consolidation trend. Deregulation allowed banks to enter new geographical markets and product areas, and technological advances revolutionized back-office processing, front-office delivery systems and payments systems. These forces encouraged growth in M&A activity in the financial sector but it is unclear whether M&A activity as such has improved performance. Studies of data from before the year 2000 seem to conclude that mergers in the banking system were not motivated (on average) by performance improvement. Studies from 2000 onwards show a different picture. In most recent studies bank mergers seem to have resulted in widespread efficiency gains and value enhancement for stockholders. Some researchers have referred to managerial motives behind consolidation transactions at the expense of shareholders. Roll's hubris hypothesis, which argues that over-confident managers systematically overestimate the benefits of acquisitions and therefore results in them overbidding for targets is also mentioned. So is managerial empire building and the observation that there is a positive correlation between asset size and CEO compensation. Evidence from studies of European bank mergers generally finds that poor performing banks are typically acquired. Evidence on the impact of consolidation on small business lending is mixed. By the year 2000, all major financial systems had removed the major regulatory product barriers in the financial services sector. The deregulation has resulted in diversification of bank activities. Studies of the impact of this development on bank performance give, however, a mixed picture. A limited number of recent studies have examined systemic risk issues in European banking. Some find that banking sector concentration increases systemic risk. The author concludes his paper by observing that we now know that safety net subsidies have been huge, and that systemic risks have brought major economies to a near standstill. He expects that after the crises many banking systems will be re-organised via forced consolidation of their banks. Chapter 4, "Sizing up performance measures in the financial services sector" by Jacob A. Bikker, De Nederlandsche Bank, provides a comprehensive overview and evaluation of various measures of banking performance. Since efficiency and competition cannot be observed directly, various indirect measures-be it simple indicators, combined indicators or indicators based on complex models-are used by both academia and practitioners. The paper shows that various indicators differ considerably in their results. The author compares 20 methods to measure banking competition and efficiency for 46 countries, covering 90% of PRODUCTIVITY IN THE FINANCIAL SERVICES SECTOR l a r c i e r affects their efficiency and risk-taking behaviour. He uses data from the EU-27 to test whether the shift towards new business has affected the Union's banking systems uniformly. Comparisons are made by constructing a best-practice efficiency frontier. The mean cost efficiency scores for the traditional EU-15 countries seem on average to be better than for the CEE countries plus Cyprus and Malta. It seems that output diversification does not change the risk-taking behaviour of banks. Chapter 13, "The effect of the environment on profit efficiency of bank branches" by Mohamed E. Chaffai, Université de Sfax and Michel Dietsch, Université de Strasbourg deals with the environment effect on profit efficiency at the branch level. The authors use a methodology with a parametric directional distance function. Data come from the branch network of a large French banking group. For each branch, information is available about the average wealth of the community's inhabitants, socio-demographical characteristics, unemployment rate, the housing market etc. The analysis concerns the impact of these environmental variables on branch efficiency and profitability. The results show that, at the branch level, the environment is an important source of technical inefficiency. Chapter 14, "Efficiency and productivity of Russian banks: distinguishing heterogeneity and performance" by Karligash Kenjegalieva and Tom Weyman-Jones, Loughborough University, applies panel data econometrics for efficiency measurement and productivity decomposition to the Russian banking system. The focus is on comparative analysis of the performance of Russian banks from financial intermediation, production and profit generating perspectives. The authors use parametric stochastic frontier techniques on a panel of over 900 commercial banks. In general, the results suggest that during the period 1997 to 2005 Russian banks experienced productivity decline in financial intermediation and banking service production. However, the profit generating activities of the banks were productive throughout the analysed time span. The main driver of banking productivity seems to be the returns to scale profile. Banks engaged in retail banking are more profit efficient than those which offer only business banking services. Larger banks seem to lag behind and deposit insurance seems to have a positive effect on banking system performance. Chapter 15, "Best practices as a business strategy for improving productivity: Summary of a panel discussion" is based on contributions by Marco Colagiovanni, Dexia Bank Belgium, Martin Czurda, Raiffeisen Zentralbank, Vienna and Roger H. Hartmann, Luxembourg Bankers' Association. Mr. Colagiovanni gives an overview of the so-called 'lean methodology' used by Dexia. It is very important to focus on what the clients want and what the competitors are able to deliver. Analysis of waste leads to focus on possible cost reductions. In most cases, waste occurs mostly between departments, not inside the individual department.