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How have global financial institutions responded to the challenges of the post-crisis era?

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  • Michael S. Pagano

Abstract

The study examines the largely unexplored effect of changes in the competitive landscape for large, global financial institutions on their ability to take risks, as well as deploy capital and labour in an efficient manner based on a novel measure of inefficiency. The analysis shows during 2001–2013 that inefficiency peaked during the 2008 crisis period and has fallen back to levels close to pre-crisis periods. The model also performs well in out-of-sample forecasts of the financial firms’ future market values. These results suggest that large financial firms have been adjusting to the ‘new normal’ of the post-crisis period and thus are able to use capital and labour more efficiently within the constraints of current market conditions. In addition, a non-linear pattern between inefficiency and a firm’s asset size suggests that there might be an optimal scale for such firms in the $450–650 billion range.

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  • Michael S. Pagano, 2017. "How have global financial institutions responded to the challenges of the post-crisis era?," Applied Economics, Taylor & Francis Journals, vol. 49(14), pages 1414-1425, March.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:14:p:1414-1425
    DOI: 10.1080/00036846.2016.1218429
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    1. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    2. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
    3. Hughes, Joseph P. & Lang, William W. & Mester, Loretta J. & Moon, Choon-Geol, 1999. "The dollars and sense of bank consolidation," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 291-324, February.
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    Cited by:

    1. Pagano, Michael S., 2022. "How do Equity Investors Assess the Efficiency of Global Financial Institutions?," Finance Research Letters, Elsevier, vol. 49(C).
    2. Pagano, Michael S., 2021. "The shrinking role of foreign operations at global financial institutions and its impact on efficiency," Finance Research Letters, Elsevier, vol. 38(C).

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