Efficiency and economies of scale of large Canadian banks

Abstract

Abstract. This paper measures the economies of scale of Canada's six largest banks and their cost‐efficiency over time. Using a unique panel data set from 1983 to 2003, we estimate pooled cost functions and derive measures of relative efficiency and economies of scale. The disaggregation of the data allows us to include non‐traditional outputs as well as time‐varying, bank‐specific effects. Our model leads us to reject constant returns to scale. These findings suggest there are potential scale benefits in the Canadian banking industry. We also find that technological and regulatory changes have had significant positive effects on the banks' cost structure.

Determinants of Managerial Behaviour in the Tunisian Banking Industry

“…[1] tests the bad management hypothesis. A priori bad management predicts a negative relationship between loan loss provision and lagged productive efficiency.…”

“…[1]- [3] shows that each dependent variable is regressed on annual lags of it and the two other variables. For instance, a significant relationship between current and past (lagged) cost efficiency would imply that the latter contains information that improves our prediction of current productive efficiency.…”

“…[1] tests the moral hazard hypothesis using a sub-sample of thinly capitalized banks. We expect a negative relationship between the loan loss provision and the lagged value of the capitalization variables.…”

“…[1]- [3] is estimated using a dynamic panel data estimator in order to reflect the panel data structure, i.e., mainly to account for the time dependence of the observations within each bank and account for bank-specific effects in the studied variables. We made use of the Arellano and Bond (1991) dynamic panel data estimator.…”

Economies of Scale in Banking, Confidence Shocks, and Business Cycles

“…In contrast to the literature on indeterminacy from the production sector, this analysis builds on the empirical evidence of Hughes and Mester (1998) that banks of all sizes exhibit signi…cant economies of scale. 1 In contrast to the literature on banking crises, the potential for indeterminacy around a single steady state is quantitatively assessed in an otherwise standard, business-cycle environment. By combining elements of both literatures, this paper is a …rst attempt at quantitatively examining the signi…cance of banking as an avenue through which agents' beliefs (or animal spirits) can be a source of business-cycle ‡uctuations.…”