Technology Investments Have Led to Excess Banking Capacity

By Teixeira, Diogo | American Banker, February 6, 1995 | Go to article overview

Technology Investments Have Led to Excess Banking Capacity


Teixeira, Diogo, American Banker


THE TRADITIONAL MEASURE of a bank's capacity is the loans that can be handled based on capital and on deposit levels. When loan demand is low, the excess funding capacity goes into securities. When loan demand is high, banks buy large Eurodollar deposits in the overnight market. In banks' role as financial intermediators, this approach is timeless. But the balance sheet is no longer a complete explanation of a bank's capacity. Banks are turning into transaction and information processing institutions. Much of the value they provide to their customers is no longer a part of the balance sheet. This new value is measured in different ways such as accounts, transactions, accuracy, or quantity of information processed.

Take today's modern transaction account. The value provided to the customer isn't measured by the balances or the interest generated. Rather, corporations are interested in the speed of payment delivery, the accuracy of the transaction, controls over credit risk, associated payment information, and, or course, low costs. Consumers are interested in convenience, comprehensive reporting, accuracy, and, again, low cost.

Yet, bank and industry statistics only cover deposit levels. Rarely do government banking statistics mention the number or type of accounts or transactions processed, the amount of backup information, the volume and accuracy of statements, etc. Of course, some banks know this. They monitor how many checking, savings, club, or Christmas accounts they have. They know average transactions per account; and possibly even cost, revenue, and profit per type of account. But, they don't reveal the information publicly and, as a consequence, there is no reliable industry data. How many checking accounts are consumed annually in the United States? Of those, what fraction have a minimum balance requirement? How many new passbook savings accounts were opened last year in California? The basic answer to all these questions is: Guess.

Were such data available, it would greatly help banks to understand and value their growing investments in information processing. But even that wouldn't be all we need to know. Output -- or current volumes -- needs to be measured against capacity, defined as the level of accounts, transactions, or other information processing activity units that a single bank, or the industry, could produce without any additional investment.

Capacity is widely followed in other industries. Airlines watch revenue seat miles and load factors very closely. Freeways can handle up to 2,000 vehicles per lane per hour in peak periods. The Organization of Petroleum Exporting Countries knows that its capacity to increase crude oil output by 5 million barrels a day gives it political power. When the world tanker fleet has overcapacity, prices drop precipitously and every ship owner suffers. Unused industrial and manufacturing capacity in the U.S helps control inflation by keeping down wages. The relative degree of undercapacity or overcapacity in an industry to produce a particular good or service influences the investment decision of individual competitors. But in banking, such nonfinancial analysis is rarely possible.

There is every reason to believe that banking suffers from severe overcapacity. Some say it's the number of banks, but technology, back offices, and branches produce bank products, not corporate organizations. Consolidation may be part of the answer, but the number of banks itself is not the measure of the overcapacity. Others point to the number of branches, yet brick and mortar is increasingly just one of several retail delivery channels. Reducing the number of branches won't reduce capacity at all if every teller is simply transferred to a telephone service center.

How should we measure a bank's capacity to produce information-based products? It's certainly not raw data processing statistics. It isn't enough to say that with a data center processing 600 MIPS (millions of instructions per second), 20,000 PCs on employees' desks, or a new application package, a bank could produce x number of mortgages or funds transfers. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Technology Investments Have Led to Excess Banking Capacity
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.