What makes a bank efficient?: a look at financial characteristics and management and ownership structure

Abstract

Increased competition, new technology, and bank consolidation are reinforcing the need for banks to operate efficiently. Moreover, recent research on banking efficiency shows that there is much room for reducing expenses and making better use of bank resources. This article compares the financial characteristics, as well as the management and ownership structure, of a sample of efficient and inefficient banks from the Tenth Federal Reserve District. The comparison reveals a number of factors that contribute to bank efficiency. ; Efficient banks control all aspects of costs, yet deliver bank services that are often more resource intensive than the services provided by less efficient banks. Stockholders at efficient banks are actively involved, play a major policymaking role, or make other contributions through the board of directors. A bank is more likely to be efficient if its manager either has a strong financial stake in the bank, or is closely monitored by stockholders and given appropriate incentives. The data further suggest that efficient banks are not achieving their efficiency by expending fewer resources on credit analysis and other forms of risk control. In sum, efficient bank operations can be obtained under a variety of circumstances, but two essential keys to success are properly motivated managers and active participation by bank owners.

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