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Distance functions, bank output, and productivity

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  • David B. Humphrey

    (Florida State University)

Abstract

The current approach to determining banking productivity using multioutput distance functions or Malmquist indices is not appropriate. This problem is specific to banking and involves a balance sheet constraint. A solution involves respecifying the distance function; measuring banking output via user cost rather than balance sheet values; and including the output service flow from bank liabilities. The last two adjustments follow what is now done by government agencies for the banking industry in the national accounts. Productivity results from current distance function specifications are contrasted with our proposed solution to the balance sheet constraint using U.S. banking data from 2001, 2005, and 2010. Changes in bank productivity over this period are due primarily to interest rate changes associated with monetary policy, rather than technical change or improvements in efficiency. This is similar to the variation in manufacturing productivity over the business cycle resulting from changes in excess capacity and disruption of business plans.

Suggested Citation

  • David B. Humphrey, 2020. "Distance functions, bank output, and productivity," Journal of Productivity Analysis, Springer, vol. 54(1), pages 13-26, August.
    • Handle: RePEc:kap:jproda:v:54:y:2020:i:1:d:10.1007_s11123-020-00582-w
    DOI: 10.1007/s11123-020-00582-w
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    More about this item

    Keywords

    Distance functions; Bank productivity; Output measurement;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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