Profits, efficiency and Irish banks

Abstract

This paper looks at the interaction between profits and efficiency in a sample of 17 Irish banks, for the years 1988 - 1991 inclusive. By contrast with previous techniques used for assessing economic models of efficiency, the method employed allows for a finer decomposition of profit loss. This loss can be attributed to allocative or technical inefficiency, and these can be derived both for inputs and outputs. Relying on the use of shadow prices, as it does, this technique allows us to make some interesting observations about the relative availability of firm-specific data in different research regimes. The results of the modelling process indicate that there is a substantial degree of loss arising in the Irish banking system. This is estimated as being an amount equal to approximately 20 per cent of the total realised profit. Most of the loss arises from input technical inefficiency i.e. poor planning on the input side of the production process. A by-product of the process is a new test for economies of scope; there is no evidence from the data that there are economies of scope for Irish banks. This is in line with previous findings.