This paper examines the improved performance of US bank holding companies (BHCs) from 1991 to 1997. Analysis of cost and profit functions using several alternative output specifications suggests that the gains were primarily due to productivity growth and changes in scale economies. Various econometric methodologies yield productivity growth of about 0.4% per year and the optimal size seems to have increased in the 1990s era of deregulation, technological change, and financial innovation. Estimates of both productivity growth and economies of scale are robust across traditional and non-traditional output specifications. Despite the overall success, however, substantial cost and profit inefficiency existed for BHCs of all sizes in the 1990s. These efficiency estimates are particularly sensitive to the output specification and failure to account for non-traditional activities like off-balance sheet (OBS) items leads profit efficiency, but not cost efficiency, to be understated for the largest BHCs.

This paper estimates multi-product cost functions for nearly 900 thrifts from 1990 to 1995. The results show the thrift industry benefited in the 1990s from a combination of reduced scale diseconomies, technical progress, and industry consolidation. The 1990 sample is characterized by substantial diseconomies of scale, which increased with thrift size, while the 1995 sample shows thrifts of all sizes operating with constant returns to scale. Sample selection is an important issue since there are fundamental differences between the thrifts that exited the industry during the 1990s and those that survived through the 1990s. If one examines all operating thrifts each year, for example, estimates of technical progress are biased upward, since large, inefficient thrifts regularly exited the industry in the 1990s.

Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say? by Kevin J. Stiroh. Published in volume 92, issue 5, pages 1559-1576 of American Economic Review, December 2002

Potential diversification benefits are one reason why US financial holding companies are offering a growing range of financial services. This paper examines whether the observed shift toward activities that generate fees, trading revenue, and other non-interest income has improved the performance of US financial holding companies (FHCs) from 1997 to 2002. We find evidence that diversification benefits exist between FHCs, but these gains are offset by the increased exposure to non-interest activities, which are much more volatile but not necessarily more profitable than interest-generating activities. Within FHCs, however, marginal increases in revenue diversification are not associated with better performance, while marginal increases in non-interest income are still associated with lower risk-adjusted profits. The key finding that diversification gains are more than offset by the costs of increased exposure to volatile activities represents the dark side of the search for diversification benefits and has implications for supervisors, managers, investors, and borrowers.

This paper examines the performance of Swiss banks from 1996 to 1999. Using a broad definition of bank output, we find evidence of large relative cost and profit inefficiencies in Swiss banks. A more narrow definition that focuses on only traditional activities leads to efficiency estimates that are even lower. We also find evidence of economies of scale for small and mid-size banks, but little evidence that significant scale economies remain for the very largest banks. Finally, evidence on scope economies is weak for the largest banks that are involved in a wide variety of financial activities. Taken together, these results suggest few obvious benefits from the trend toward larger, universal banks in Switzerland.

This paper examines the evolution of productivity in U.S. manufacturing plants from 1963 to 1992. We define a vintage effect as the change in productivity of recent cohorts of new plants relative to earlier cohorts of new plants, and a survival effect as the change in productivity of a particular cohort of surviving plants as it ages. Both factors contribute to industry productivity growth, but play offsetting roles in determining a cohort's relative position in the productivity distribution. Recent cohorts enter with higher productivity than earlier entrants did, whereas surviving cohorts show productivity increases as they age. These two effects roughly offset each other, however, so there is a rough convergence in productivity across cohorts in 1992 and 1987.

The US banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks’ retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across US banks is linked with significantly lower equity market and accounting returns for all banks, but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low return one.

The U.S. economy has expanded rapidly in recent years, with total factor productivity (the source of growth most closely identified with technological gains) rising sharply since the mid-1990’s (see e.g., Bureau of Labor Statistics, 1999; William Gullickson and Michael J. Harper, 1999; Mun S. Ho et al., 1999; Daniel E. Sichel, 1999). This strong aggregate performance and the well-documented explosion of investment in computers and other high-tech equipment have led many to believe that the United States has experienced a permanent, technology-led growth revival. It is essential, however, to disaggregate estimates of economic growth to the industry level to understand the new trends in the U.S. economy. Productivity growth, the ability to produce more outputs from the same inputs, differs widely among industries. For the economy as a whole, negative productivity growth in one industry can offset positive productivity growth in another, and Jorgenson (1990) shows that a measure of productivity based solely on aggregate data is valid only under very stringent conditions. We avoid the limitations of an aggregate measure of productivity by decomposing U.S. growth across industries for the period 1958–1996. By breaking down the U.S. economy into 37 industries (35 private industries, private households, and general government), we identify the contribution of each industry to aggregate productivity growth. This enables us to isolate the underlying sources of gains in productivity and provides a better understanding of the forces driving the U.S. economy. Economy-wide productivity from an aggregate production function increased 0.45 percent per year during 1958–1996, while methodology developed by Evsey Domar (1961) for aggregating over industries yields an aggregate estimate of 0.48 percent. Over the same period, however, industry productivity growth ranged from 1.98 percent in Electronic and Electric Equipment to 20.52 percent in Government Enterprises, highlighting fundamental differences in technology and productivity growth across industries. These results show that the aggregate production function provides a reasonable estimate of productivity trends over long periods but also masks important differences among industries.

The rapid diffusion of information technology (IT) is a direct consequence of the swift decline in the price of computer-related equipment, which has led to a vast and continuing substitution of IT equipment for other forms of capital and labor. This substitution generates substantial returns for the economic agents who undertake IT investments and restructure their activities in order to increase the role of IT. There is little evidence, however, that substitution is accompanied by technical change as this term is used by economists. While this appears highly paradoxical to technologists, who think of substitution of a more IT-intensive mode of production for a less ITintensive mode as a change in technology, it is entirely consistent with the economic framework developed by Robert M. Solow (1957). What do economists mean by ‘‘technical change’’ and how could this exclude the substitution of a more IT-intensive production process for one that is less IT-intensive? Substitution represents movement along a given production function, while technical change corresponds to a shift in the production function. Substitution takes place if the introduction of computer-intensive equipment produces benefits that are fully captured or internalized by the users of IT and their suppliers. Technical change occurs only if more