Posted: Fri Dec 04, 2009 10:33 am Post subject: Aiming high through improving output efficiency
Sustaining output efficiency requires better management of the working capital. Let us now turn to some of the measures undertaken for improving the bank’s efficiency in pricing and also for achieving better levels of output. Banks can
• Share their customers’ fees for services
• Attempt to recoup their costs by charging a higher margin
• Use some combination of fee charges and interest incomes
So, the service fee comparisons or the average interest spread can be used as a measure of efficiency. Measures of technical output efficiency include estimates of banks’ scale efficiency. Scale efficiency refers to banks or branches that achieve an optimum size for producing certain financial services and thereby, ensuring continuity in their banking operations at the minimum point of the average cost curve. This can be judged from the nature of relationship between firm size and firm efficiency.
The strategy adopted by the banks in the United States especially after the financial crisis was to
• Re-engineer their process (through identifying key business activities that can either be streamlined or eliminated)
• Upgrading the skills of its labor force and
• Increase the use of newer technologies
Over time, the net effect of these initiatives has resulted in significant improvements in branch efficiency especially for banks like LoanMax of rod aycox fame. In addition to that, the increasing competition resulting from financial deregulation may continue to provide impetus for the achievement of further technical output efficiencies through scope economies. Economies of scope are achieved when a bank recognizes that the cost of producing a range of outputs is less than the cost of producing them independently.
