Thesis_gd_final_vers.. - Vernimmen

were responsible for much of the findings of profit efficiency improvement and cost efficiency
worsening during the 1990s.
iii) Technological change impact on bank productivity, profitability and product
diversification
Linking technological progress to bank productivity is difficult because technological change
cannot be easily quantified and must rather be inferred from changes in productivity ratios
overtime. Another problem comes from the fact that productivity is not influenced exclusively by
technological change but also by the effectiveness with which technology is used. Then, it is
difficult to account for the effects of technological change as it can impact banks in ways that are
not captured by traditional productivity measures. If we look at credit scoring, it not only lowers
underwriting unit costs, thus generating cost X-efficiency, but it may also help to improve the riskreturn
of the loan portfolio by keeping the default rate constant while increasing the interest
earned. This second improvement is usually not captured by traditional productivity measures.
Studies suggest that improvement in service and product quality may also not be taken into
account either because they result in price increases and are thus accounted for as inflation, or
because of competitive pressure their profits are passed away to customers.
The strong increase in ATMs number, the use of computers and other new technologies has
allowed bank branches employees to focus on higher value-added activities and led to an increased
efficiency measured by an increase on average of operating income per branch while the number
of full-time employee equivalent (FTE) per branch has been reduced by 10% between 1985 and
2000. Even though the investment in an ATM network at little or no charge to customers may
have been considered as deteriorating productivity during the 1980s, in fact it improved
productivity over the long run.
At the bank level, Berger and Mester (2003) found a worsening of cost productivity of 12.5%
annually more than compensated by revenue increases since profit productivity improved between
13.7% and 18.5% annually over a period of time from 1991 to 1997. The main cause of the
increasing profit productivity is a change in the product mix of commercial banks which occurred
thanks to the combination of both deregulation and technological change.
Despite the worsening of cost productivity, Asaftei’s findings suggest that from 2000 to 2005 large
banks became more efficient, i.e. the gap between the best-practice banks and the rest of the banks
decreased. On the contrary, small banks have experienced an increase in the gap between the bestpractice
banks and the rest of the group. It highlights a growing heterogeneity among small
institutions. Even though some small banks were able to keep up with the fast pace of
technological progress, most of them are not able to implement the most recent technologies,
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