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The Productivity of Financial Intermediation and the Technology of Financial Product Management

Author

Listed:
  • Martin R. Holmer

    (HR&A, Inc., Washington, D.C.)

  • Stavros A. Zenios

    (University of Cyprus, Nicosia, Cyprus)

Abstract

Financial intermediaries—banks, thrifts, and life insurance companies—have experienced low productivity over the last decade or two. Low productivity has manifested itself as a declining market share of their products relative to capital market assets. In some cases, low productivity caused a failure to meet contractual obligations embodied in their financial products. These failures resulted in customer losses, and/or taxpayer losses when failed intermediaries were guaranteed by government agencies. This productivity problem has been analyzed mostly from an economic science perspective, by R. C. Merton (Merton, R. C. 1990. The financial system and economic performance. J. Fin. Serv. Res. 263–300.) and Z. Bodie (Bodie, Z. 1990. Pension funds and financial innovation. Finan. Mgmt. (Autumn).). The focus of the economic analysis is the improvement of regulatory measures for intermediaries whose financial products are guaranteed by government agencies. In this paper we take a management science perspective by focusing on the technology of financial product management. An assessment of current technologies finds that their use can leave financial intermediaries exposed to substantial risks. An improved technology— integrated product management (IPM)—is suggested that enables intermediaries to increase productivity. Therefore, they can respond more effectively to market pressures from competing capital market assets and to regulatory pressures from government agencies. Technical and organizational aspects of integrated product management are described, and its application to three examples is discussed. The problem outlined here presents a major challenge to management scientists. It is an example of the service-sector applications that A. Geoffrion (Geoffrion, A. M. 1992. Forces, trends and opportunities in MS/OR. Opns. Res. 40 423–445.) addressed in his 1991 Omega Rho lecture.

Suggested Citation

  • Martin R. Holmer & Stavros A. Zenios, 1995. "The Productivity of Financial Intermediation and the Technology of Financial Product Management," Operations Research, INFORMS, vol. 43(6), pages 970-982, December.
    • Handle: RePEc:inm:oropre:v:43:y:1995:i:6:p:970-982
    DOI: 10.1287/opre.43.6.970
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    Citations

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    Cited by:

    1. Antreas D. Athanassopoulos & Andreas Soteriou & Stavros Zenios, 1997. "Disentangling Within- and Between-Country Efficiency Differences of Bank Branches," Center for Financial Institutions Working Papers 97-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Consiglio, Andrea & Cocco, Flavio & Zenios, Stavros A., 2008. "Asset and liability modelling for participating policies with guarantees," European Journal of Operational Research, Elsevier, vol. 186(1), pages 380-404, April.
    3. Andrea Beltratti & Andrea Consiglio & Stavros Zenios, 1999. "Scenario modeling for the management ofinternational bond portfolios," Annals of Operations Research, Springer, vol. 85(0), pages 227-247, January.
    4. Andrea Consiglio & Flavio Cocco & Stavros A. Zenios, 2001. "The Value of Integrative Risk Management for Insurance Products with Guarantees," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 2(3), pages 6-16, February.
    5. Amy V. Puelz, 2002. "A Stochastic Convergence Model for Portfolio Selection," Operations Research, INFORMS, vol. 50(3), pages 462-476, June.
    6. Andrea Consiglio & Somayyeh Lotfi & Stavros A. Zenios, 2018. "Portfolio diversification in the sovereign credit swap markets," Annals of Operations Research, Springer, vol. 266(1), pages 5-33, July.
    7. Abramov, Alexander E. (Абрамов, Александр) & Aksenov, Ivan V. (Аксенов, Иван) & Radygin, Alexander D. (Радыгин, Александр) & Chernova, Maria I. (Чернова, Мария), 2018. "Modern Approaches to Measuring the State Sector: Methodology and Empirics [Современные Подходы К Измерению Государственного Сектора: Методология И Эмпирика]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 28-47, April.
    8. John Board & Charles Sutcliffe & William T. Ziemba, 2003. "Applying Operations Research Techniques to Financial Markets," Interfaces, INFORMS, vol. 33(2), pages 12-24, April.
    9. Consiglio, Andrea & Zenios, Stavros A., 1997. "A model for designing callable bonds and its solution using tabu search," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1445-1470, June.
    10. Andreas Soteriou & Stavros A. Zenios, 1999. "Operations, Quality, and Profitability in the Provision of Banking Services," Management Science, INFORMS, vol. 45(9), pages 1221-1238, September.
    11. Andrea Consiglio & Stavros A. Zenios, 1999. "Designing Portfolios of Financial Products via Integrated Simulation and Optimization Models," Operations Research, INFORMS, vol. 47(2), pages 195-208, April.
    12. Christiana V. Zenios & Stavros A. Zenios & Kostas Agathocleous & Andreas C. Soteriou, 1999. "Benchmarks of the Efficiency of Bank Branches," Interfaces, INFORMS, vol. 29(3), pages 37-51, June.

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