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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?
Allen N. Berger and Loretta J. Mester

Abstract: Over the past several years, substantial research effort has gone into measuring the efficiency of financial institutions. Many studies have found that inefficiencies are quite large, on the order of 20 percent or more of total banking industry costs and about half of the industry's potential profits. There is no consensus on the sources of the differences in measured efficiency. This paper examines several possible sources, including differences in efficiency concept, measurement method, and a number of bank, market, and regulatory characteristics. We review the extant literature and provide new evidence using data on U.S. banks over the period 1990-95.

Keywords: Bank, efficiency, cost, profit

Full paper (3060 KB PDF)

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Last update: July 16, 1997