The comparison of efficiency indices pre-and post-financial meltdown suggests that the efficiency of banks has increased post crisis vs. pre-crisis. The results of the study, in addition, indicate that total factor productivity has increased for commercial banks following the financial crisis. This increase in productivity is due to efficiency improvement and technological progress.
The major source of the data for this study is the “call and report” from the Federal Reserve of Chicago. It covers a period of 8 years from 2005 to 2012. We limit our data to banks with total assets of $2,000 million, which we label as large banks. We include banks that were in operation during the entire period of 2005-2012. To measure input and output, we follow the intermediation approach in which banks purchase funds and deposit them to produce loans and investments. More specifically, we use total liabilities, premises and fixed assets, and number of full-time equivalent employees (measure of labor) as inputs utilized by each bank to produce commercial and industrial loans, real estate loans, other loans, and total investment securities, as outputs. In other words, we assume each bank, as a production unit, utilizes total liabilities, premises and fixed assets, and the number of full-time equivalent employees as a set of inputs to produce commercial and industrial loans, real estate loans, other loans, and total investment securities as set of output.The prices of inputs are defined and measured as the unit price of labor, unit price of interest, and unit price of fixed assets on the basis of which total cost is calculated.