The Labor Productivity Competitiveness of U.S. versus Foreign Commercial Banks

Article excerpt

ABSTRACT

The productivity of labor, measured as the ratio of employees to total assets, has since the 1970s been a common measure of bank performance. Using what this article argues is a better indicator of the competitiveness of commercial banks--the number of employees required to generate one million U.S. dollars in annual revenues--this study concludes that U.S. banks are being outperformed by their foreign counterparts.

INTRODUCTION

The increasing globalization and integration of financial markets and the rapid pace of technological change in the financial services industry are compelling the world's financial intermediaries in general, and commercial banks in particular, to implement innovative ways to cut costs and improve performance in order to meet the challenge of keener domestic and international competition.

Mergers, consolidation of operations, new product and market development and moves toward paperless retail banking are some of the means through which banks around the world are pursing gains in their competitive position. In the midst of these developments, interest on issues of bank performance, efficiency, and competitiveness remains high among academicians as well as practitioners.

This study focuses on the specific issue of labor productivity as a measure of performance and as an indicator of the competitiveness of United States banks versus their foreign counterparts. Section two of this paper reviews the literature on the labor productivity approach to evaluate bank performance. Section three details the methodology to measure and compare the competitiveness of American and foreign commercial banks, based on the labor efficiency yardstick. Discussion of the results in part four is followed by the conclusions at the end of the paper.

REVIEW OF THE LITERATURE

A common approach to measure and rank the performance of the largest commercial banks in the world has been to analyze their levels of employment and patterns of labor utilization. Generally, under this approach, "production" of financial services is quantified in terms of a given bank's total assets and the institution's performance is evaluated via the productivity of its labor as measured by the number of employees needed to generate a given level of production of financial services (total assets).

The method of using labor productivity as the yardstick to evaluate bank performance was pioneered by G. G. Kaufman using 1967 data for large banks in industrialized and developing countries (Kaufman, 1970). He concluded that the efficiency of labor was highest in banks based in the United States and lowest in Japanese banks. Similar conclusions were reached by B.K Short also using data for 1967 (Short, 1971).

In 1984, Sang-Rim Choi and Adrian Tschoegl used 1979 data to reach the significantly different conclusion that the labor efficiency of Japanese banks was now higher than that of banks in the United States. Results of their study showed that American banks required more workers to produce the same level of financial services than their counterpart institutions in Japan and in other industrialized nations (Choi and Tschoegl, 1984). More recently, with figures for the 1980-1986 period, WC. Hunter and S.G. Timme, updating the previous studies by Kaufman, Short and Choi and Tschegl and continuing to use total assets as the measure of production of financial services, reaffirmed Choi and Tschegl's findings and concluded that large U.S. banks were being outperformed by banks in other industrialized countries, based on labor productivity rates (Hunter and Timme, 1990).

Bank mergers in the 1990s, including those of BankAmerica and Security Pacific, Chemical Bank and Manufacturers Hanover Trust, First Chicago and N.B.Detroit and lastly Chase Manhattan and Chemical Bank, have contributed to the increasing consolidation in the U.S. banking industry that has resulted in a 36 percent reduction in the number of independent banking organizations--from 12,380 in 1980 to 7,926 in 1994 (Ritter, Silber and Udell, 1997). …