Malmquist Indices of Productivity Change in Portuguese Banking: The Deregulation Period

By Rebelo, Joao; Mendes, Victor | International Advances in Economic Research, August 2000 | Go to article overview

Malmquist Indices of Productivity Change in Portuguese Banking: The Deregulation Period


Rebelo, Joao, Mendes, Victor, International Advances in Economic Research


VICTOR MENDES [*]

This paper will evaluate productivity change in Portuguese banking using the Malmquist productivity index. The results show that between 1990 and 1997, banks in Portugal witnessed increased productivity and strong technological progress. Both small and large banks experienced higher productivity and technological change scores, while mid-sized institutions are putting more effort into catching-up policies. Rural banks have experienced strong productivity growth and are catching up with the best practices but lower levels of technological change. Urban banks show higher productivity growth and technological change levels. Government-owned banks have experienced lower levels of productivity change. Finally, the asset per employee ratio shows a positive correlation with the productivity scores, suggesting that this simple index is a good proxy for productivity. (JEL D2, G2, O3).

Introduction

Over the last 20 years, financial institutions and markets have undergone revolutionary changes all over the world. The Portuguese financial system is no counterexample. Spurred by phenomena like deregulation, privatization, globalization, and the rapid changes in technology, and once segmented markets broke down, new financial instruments developed at a dizzying pace. Old banks actively compete with new banks and other financial institutions. [1]

In the mid 1980s and as a result of integration within the European Economic Community, a profound period of economic liberalization started to unfold, along with the reopening of the banking industry to the private initiative. In the last 10 years, new entrants into the banking business were typically small banks. There was a huge amount of money invested either in distribution channels or in computer and software systems. As a result, Portuguese banks were able to produce new services and increase the quality of their productive and organizational systems, with a corresponding effect on productivity and production costs. It is possible that most of these strategies will continue in the near future as a result of Portuguese membership in the European Monetary Union. According to the European Central Bank 111999, pp. 4-5]: "Current developments show that banks are devising strategic responses in three mains directions: (i) improvements in services and procedures (concerning the quality of services, staff and IT; risk management and internal control systems, cost-cutting and efficiency improvements); (ii) changes in product ranges (shift from operating services to consulting; reconsideration of product ranges, development of alternatives sources of income, e.g., through geographical expansion); and (iii) mergers, strategic alliances and co-operation agreements. These are undertaken for a variety of reasons, including cost and efficiency improvements (economies of scale and scope), product diversification, new distribution channels (electronic banking) and geographical expansion."

However, not all banks are able to take advantage of the new technologies. From a technological standpoint, some of them are not efficient.

Input productivity growth is related to shifts in both technology and technical efficiency. Government agencies typically measure productivity growth by the change in the ratio of an output index (such as value added, assets, deposits, loans, or number of operations) to an input index (labor, capital, branches, and the like). These ratios do not consider the multiproduct nature of the banking activity and do not separate shifts of the production frontier from changes in inefficiency or deviations from the frontier. Therefore, it is difficult to draw conclusions as to whether technology is improving or more banks are taking advantage of existing technology.

The literature on costs, efficiency, and the productivity of financial institutions is voluminous. [2] Earlier papers studied the cost structure of banks by examining the existence of scale and scope economies and indices of productive, technical, and allocative efficiency. …

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