Allocative and technical efficiency of New Zealand Banks

Abstract

Purpose Paying too much for funding or failing to obtain adequate returns for lending and interest-bearing assets because of inappropriate mix is just as much a source of inefficiency in banking as overutilisation of input resources. The purpose of this research is to examine bank performance in terms of both technical and allocative efficiency. Design/methodology/approach This paper uses an extensive quarterly data set from New Zealand (NZ), which allows a decomposition of interest costs and revenues into quantity and price effects to explore the factors, including both technical and allocative efficiency, that impact changes in banks’ costs and revenues. Findings The research finds that focusing solely on technical efficiency can give a misleading impression of banking performance in our NZ sample. The inclusion of allocative efficiency measurement shows greater variability of performance, as well as highlighting changes in the mix of inputs and outputs needed for banks to improve performance. Originality/value A focus on prices and allocative efficiency has received little attention in the academic literature on banking. This paper shows how banking data can be decomposed into the respective price and quantity components.