Berger, A.N., Hancock, D., Humphrey, D.B., 1993. Bank efficiency derived from the profit function, Journal of Banking and Finance 17, 317-47.  Home/Search   Document Not in Database   Summary   Related Articles   Check

....lines of business benefit from scale while others may be hampered by it. The crucial issue in efficiency is the right sizing of the total firm, and the right sizing of individual businesses within the firm. Nonetheless, if costs are decreasing in scale over the relevant range as some suggest (Berger, Hancock, and Humphrey, 1993, Hughes and Mester, 1998) larger institutions may be more efficient in terms of average operating costs. In such a case productivity of facilities and personnel can be improved by adding them to a larger organization. Examples of areas of potential gains include the physical branch distribution ....

....financial services find it more advantageous to purchase multiple products from the same provider (Herring and Santomero, 1990, Berger, Humphrey, and Pulley, 1996) Combining both of these aspects of scale broadly defined, economists often refer to the total effect as improved profit efficiency. Berger, Hancock and Humphrey 1993. The latter term refers to the ability of profits to improve from any of the sources noted above, viz. cost, scope or consumption economies. In a sense, it captures the total efficiency gains from scale without specific reference to the separately titled efficiency improvement areas. The key ....

Berger, Allen N., Diana Hancock, and David B. Humphrey. 1993. "Bank Efficiency Derived from the Profit Function." Journal of Banking and Finance 17: 317-47.

....Avery et al. 1996) Altman and Haldeman (1995) Asch (1995) and Boyes, Hoffman, and Low (1989) and 16 references contained therein. For developing country scoring functions, see for example Vigan (1993) and the references contained there. For other studies estimating bank profit functions see Berger, Hancock, and Humphrey (1993) and the references contained therein. The only study 17 we know of that estimates a profit function for credit unions is Beshouri and Glennon (1996) which uses a sample of U.S. credit unions and a loglinear profit equation. Materials refer to all non wage administrative costs. Loans were not ....

Berger, Allen N., Hancock, Diana, and Humphrey, David B. 1993. "Bank Efficiency Derived from the Profit Function". Journal of Banking and Finance. 17:317-347.

....E(exp( i i v ) z ) see Greene, 1993) providing an estimate of the ratio of frontier costs to actual costs for each firm in i the sample. An alternative to making explicit distributional assumptions is provided by the distribution free method developed by Schmidt and Sickles (1984) and Berger (1993). This method can be used when several years of data are available. The cost function is estimated for the entire data period, either year by year or by pooling the data for all years. The residuals from the cost function estimation constitute a vector of random error terms for each firm, z = z , ....

Berger, Allen N., Diana Hancock, and David B. Humphrey, 1993, "Bank Efficiency Derived from the Profit Function," Journal of Banking and Finance, 17 (April): 317-47.

....efficiency concept for evaluating the overall performance of the firm. Profit efficiency accounts for errors on the output side as well as those on the input side, and some prior evidence suggested that inefficiencies on the output side may be as large or larger than those on the input side (e.g. Berger, Hancock, and Humphrey, 1993). Profit efficiency is based on the more accepted economic goal of profit maximization, which requires that the same amount of managerial attention be paid to raising a marginal dollar of revenue as to reducing a marginal dollar of costs. That is, a firm that spends 1 additional to raise revenues ....

....the concept of alternative profit efficiency, which may be helpful when some of the assumptions underlying cost and standard profit efficiency are not met. Efficiency here is measured by how close a bank comes to earning 3 A few prior papers have studied standard profit efficiency at U.S. banks (Berger, Hancock, and Humphrey, 1993, DeYoung and None, 1996, Akhavein, Swamy, and Taubman, 1997, and Akhavein, Berger, and Humphrey, 1997) The measured average profit efficiencies ranged from 24 of potential profits being earned to 67 . Profit function estimation was also used to measure efficiency in terms of the risk expected ....

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Berger. A.N., D. Hancock, and D.B. Humphrey, 1993, Bank efficiency derived from the profit function, Journal of Banking and Finance 17, 317-347.

....But certain facts suggest that this approach t o understanding the effect of mergers warrants at least some consideration. It is a well documented fact that the variability of efficiency across banks of a specific size and See Berger, Hanweck and Humphrey (1987) Berger and Humphrey (1991) Berger, 1 Humphrey and Timme (1993) or Berger and Humphrey (1994) for a discussion of the overwhelming evidence. Frei, Harker and Hunter (1995) 2 product mix is far greater than any variation in efficiency that has been associated with either scale or scope. unity for revenue enhancement as well as cost Accordingly, there ....

Berger A., D. Hancock, and D. Humphrey, Bank Efficiency Derived from the Profit Function, Journal of Banking and Finance 17: 317-47, April 1993.

.... assets, with a larger scale efficient point generally being found when the banks in the sample were larger (Hunter and Timme 1986, Berger, Hanweck, and Humphrey 1987, Ferrier and Lovell 1990, Hunter, Timme, and Yang 1990, Noulas, Ray, and Miller 1990, Berger and Humphrey 1991, Mester 1992b, Bauer, Berger, and Humphrey 1993, Clark 1996) Despite the different findings, almost all of the studies suggested that there were no significant scale efficiencies to be gained and possibly some slight scale efficiency losses to be suffered from M As involving large banks. Similarly, studies of cost scale efficiency in the ....

....scale, scope, and product mix on revenue and profit efficiency. The scale results are ambiguous, with some evidence of mild ray scale efficiencies in terms of joint consumption benefit for customers (Berger, Humphrey, and Pulley 1996) and profit efficiency sometimes being highest for large banks (Berger, Hancock, and Humphrey 1993), sometimes being highest for small banks 22 (Berger and Mester 1997) and sometimes about equal for large and small banks (Clark and Siems 1997) In terms of scope and product mix economies, one study found little or no revenue scope efficiency between deposits and loans in terms of charging ....

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Berger, A.N., Hancock, D., Humphrey, D.B., 1993. Bank efficiency derived from the profit function, Journal of Banking and Finance 17, 317-47.

....banks being slightly more scale efficient than either large or small banks. Only small banks appear to have the potential for scale efficiency gains and the measured economies are usually relatively small, on the order of 5 or less [see the surveys by Mester (1987) Clark (1988) Humphrey (1990) Berger, Hunter, and Timme (1993)] The primary uncertainty in this literature is the location of the bottom of the average cost U the scale efficient point. Studies that used only banks with under 1 billion in assets, studies that used banks of all sizes, and a study that included all banks of over 100 million in assets ....

.... the efficient frontier are generally quite close [see Berger and Humphrey (1991) Bauer et al. 1993) McAllister and McManus (1993) Mester (1993) Second, comparisons of scale economies with scale efficiencies show that they tend to be within a few percent of each other in most instances [see Berger (1993, 1994) Evanoff and Israilevich (1991) Third, use of nonparametric methods generally give the same basic result that scale economies are important only for the smallest banks, although it does seem to suggest that the scale diseconomies for the largest banks may be the result of the rigidity of ....

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Berger, A.N., D. Hancock, and D.B. Humphrey, "Bank Efficiency Derived from the Profit Function," Journal of Banking and Finance 17 (April 1993): 317-47.

....statistically significant revenue complementarities or fixed revenue effects among banks over 1978 1990. In other words, revenues are 3 While the existence of jointness in financial services has been tested statistically in a profit function context (and found to be significant Hancock, 1992; Berger, Hancock, and Humphrey, 1993), this result can be due to either cost scope economies, revenue scope economies, or both. Profits can be higher with joint provision of financial services either from lower costs or higher revenues. 4 no larger when deposits and loans are provided jointly rather than separately and consumers ....

Berger, A., Hancock, D. and Humphrey, D. 1993. Bank efficiency derived from a profit function.

....in the choice of output scale and mix, since the output choices are free to vary in the profit function. For the cost function, however, outputs are taken to be fixed. Our efficiency analysis utilizes the distribution free methodology introduced by Schmidt and Sickles (1984) and modified by Berger (1993). This approach avoids imposing arbitrary distributional assumptions on the composed error terms of econometric cost and profit functions to separate inefficiencies from random error. Instead, we simply assume that inefficiencies are persistent or stable over time, whereas random error tends to ....

....the random error follows a symmetric normal distribution. Those who apply TFA typically assume that deviations from predicted costs 9 assumption that efficiencies are relatively stable over time has been supported by earlier research (see Berger and Humphrey 1991, 1992b, Bauer, et al. 1993, Berger 1993). For cost efficiency, the assumptions of the distribution free method mean that good management keeps costs relatively low over long periods of time, although costs may fluctuate from trend because of luck or measurement error. If efficiency does change somewhat over time, then the ....

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Berger, Allen N., Diana Hancock, and David B. Humphrey, 1993, "Bank Efficiency Derived from the Profit Function, " Journal of Banking and Finance, 17 (April): 317-47.

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Berger, A. N., Hancock, D., Humphrey, D. B. (1993), "Bank Efficiency Derived from the Profit Function," Journal of Banking and Finance, 17, 317-348.

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