The Federal Reserve Board eagle logo links to home page
Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page What Explains the Dramatic Changes in Cost and Profit Performance of the U.S. Banking Industry?
Allen N. Berger and Loretta J. Mester

Abstract: We investigate the sources of recent changes in the performance of U.S. banks using concepts and techniques borrowed from the cross-section efficiency literature. Our most striking result is that during 1991-1997, cost productivity worsened while profit productivity improved substantially, particularly for banks engaging in mergers. The data are consistent with the hypothesis that banks tried to maximize profits by raising revenues as well as reducing costs, and that banks provided additional services or higher service quality that raised costs but also raised revenues by more than the cost increases. The results suggest that methods that exclude revenues may be misleading.

Keywords: Bank, productivity, efficiency, cost, profit

Full paper (4048 KB PDF)

Home | Economic research and data | FR working papers | FEDS | 1999 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: March 19, 1999