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Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods

01.01.97

This working paper is from the Financial Services working paper series.

We propose a set of consistency conditions that frontier efficiency measures should meet to be most useful for regulatory analysis or other purposes. The efficiency estimates should be consistent in their efficiency levels, rankings, and identification of best and worst firms, consistent over time and with competitive conditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches -- DEA, SFA, TFA, and DFA -- and find mixed results.

JEL Classification: G21, G28, E58

Keywords: Financial Institutions, Efficiency, Regulation

Suggested citation: Bauer, Paul, Allen Berger, Gary Ferrier, and David Humphrey, 1996. “Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods,” Federal Reserve Bank of Cleveland, Working Paper, Financial Services Research Group no. 02-96.

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