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July/August 1995, 
Vol. 77, No. 4
Posted 1995-07-01

Evaluating the Efficiency of Commercial Banks: Does Our View of What Banks Do Matter?

by David C. Wheelock and Paul Wilson

An inefficient business wastes resources, either by producing less than the feasible level of output from a given amount of input or by using excessive input to produce a given amount of output. Researchers often find that banks are quite inefficient, but don’t agree on how best to measure that inefficiency, or even how to measure bank production. David C. Wheelock and Paul W. Wilson show that the average estimated inefficiency, and even the ranking of banks by their inefficiency, is sensitive to whether bank loans and deposits are measured in dollar amounts, or the number of loans and accounts. Their research indicates that in the absence of a standard view of how to measure bank production, the extent to which banks are inefficient will remain an open question.

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