sou · GOB311d5 · 2001-01-01 00:00:00 — 23One should not under-estimate this risk for the Nordic financial institutions. The franchise value of Nordic institutions is virtually totally dependent on the existing branch network. The potential of new distribution channels exposes this to some risk. However, name-recognition is of some importance and new distribution channels may need to establish this as well. Consolidation and Strategic Positioning objective, alliances with institutions elsewhere might be needed. This is particularly true for banks with aspirations beyond retail and the lower and middle corporate market. See also my comments below on investment banking; A viable role in investment banking requires "deep pockets" and an international, rather than regional presence. Neither condition is or can be met by the Swedish institutions on their own. True aspirations in that direction can only be met with mergers beyond the Nordic market; Narrower strategies (e.g. the "traditional" Citibank strategy: retail, asset management and lower/middle corporate market) might allow for a sustainable role as independent regional player. Focus should be on exploiting relationships and services that are targeted to this relationship-oriented clientele; The previous point also implies that financial institutions should aim at optimally exploiting scope economies. I doubt that this allows for broad banking strategies by Nordic players unless they engage in alliances, see issue/item v; The previous points imply that only narrower strategies are viable for independent Nordic banks. An exception is possibly asset management. This is an important market and at least one of the Nordic players might be able to capitalize on it. The combination of asset management on a large, possibly international scale and regionally focused banking might be feasible. In this way, some synergies could also be obtained with life insurance activities. That is, life insurance could fit with the relationship orientation of the regional bank and simultaneously add to the asset management pool. An alternative is "alliance model" for asset management activities, see issue/item v; My impression is that the main strategic options for Nordic banks involve expansion beyond the Nordic market (e.g. Baltic countries) and alliances for investment banking and/or asset management. For some, real integration of life insurance and (possibly) pension business may add directly to the existing relationship-oriented banking activities. v. Value of alliances The concept of alliances has yet to be developed in the context of banking. This is to some extent surprising. Banks did, and still do, engage in correspondent banking, particularly in the context of cross- border payment services. But correspondent banking is losing its importance. With the advent of information technology international payment and settlement systems have become available Volym D:250 Supplement 27 (e.g. the emergence of TARGET and settlement systems like Cedel and Euroclear). These developments reduce the need for correspondent banking. importantly, correspondent banks may have become competitors in the areas they were cooperating in before. For example, some banks seek to gain a competitive edge by offering proprietary cross border payment facilities. This points at an important consideration for the feasibility of correspondent banking, or alliances for that matter. It only works if the interests of the participating institutions are sufficiently aligned.24 But why may alliances become important, particularly, within the context of Nordic banking? The main reason I see is that institutions that seek to capitalize on their local presence, with benefits rooted in strong relationships, cultural adaptation, etc., may need smooth access to some investment banking and asset management services that are scale intensive and globally, rather than locally oriented. It may well be possible to offer some of these services in an alliance (i.e. "to join forces") and capitalize on customer-related synergies. In the context of Nordic banking, I could envision cooperation along this dimension with (regional) banks outside the Nordic countries. While some will argue that a merger with these institutions would allow for a smoother operation of these services, I would like to take issue with this point of view. First, for several reasons, cross border mergers may not (yet) be feasible. A focused alliance would create valuable linkages between institutions with immediate synergy benefits (see above), but could also allow the possibly nationally-rooted partners to "get to know" each other. In that sense, it would be an intermediate phase. As a second argument, the alliance-model based on asset management and/or specific investment banking activities may, if properly designed, combine the benefits of an integrated banking structure and a stand-alone type of organization of those activities. For example, the alliance partners all have a limited exposure to these activities which helps them maintain focus. In particular, "cultural" conflicts and distractions associated with trying to build up (or buy) an investment bank next to running the relationship-rooted regional bank are prevented.25 Obviously, the alliance model does not come without cost. The important task is to define a clearly defined portfolio of activities that would become part of the alliance. This will not be investment banking in the broadest sense of 24Observe that correspondent banks could traditionally not enter each others markets. Interests were therefore more readily aligned. 25The experience of some western banks is that top management gets fully distracted by the investment banking activities and spends disproportionally time on the often more profitable non-investment banking activities. Consolidation and Strategic Positioning Similarly, in the case of asset management, the alliance partners would each maintain their own proprietary access to the but join forces in the asset management operations including research and back office activities. This would facilitate the information technology investments that allow the partners to capitalize on scale economies. Maintaining proprietary access by the individual alliance partners preserves customer-related scope economies. There are powerful forces behind consolidation. I believe that consolidation is only partially driven by value-maximizing behavior. As I have emphasized, also the political dimension cannot be ignored. Consolidation in Europe and the US will continue. The regional expansion that characterizes much of the US merger wave will carry over to Europe. Cross-border acquisitions are coming, particularly with the arrival of the Euro and Monetary Union (EMU). The Euro and EMU are catalysts and will accelerate the integration of national financial markets, and induce a more pan-European view on financial services.26 The merger wave will continue and, in my view, become excessive (overshooting). Ultimately, it will lead to a level of consolidation in the industry that will be reversed and lead to downsizing and refocusing. In the consolidation phase, however, larger financial institutions will be "forced" to follow "the herd". Swedish banks have rightfully chosen to expand in the Scandinavian territory. This type of regional expansion is in my view value enhancing. Whether Scandinavian banks will ultimately survive as independent financial institutions is questionable. In my view, alliances are crucial to maintain the viability of regionally focused banks. But even then, once the regional expansion in the Scandinavian market is completed, the surviving institutions become prime targets for the powerful European institutions. 26 I have said about moral hazard and regulation in light of the consolidation. For one reason there is broad agreement: certifying risk management processes is the primary task of supervision, and the EU has quite wisely allocated this task unambiguously to home country supervisors. This is something still to be addressed in the U.S. observing the multiplicity of regulators. The consolidation, and broadening of scope now also observed in the U.S. (e.g. Travelers and Citicorp), amplifies the importance of this issue. 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Schmeits, A., (1997), Discretion in and the Firm's Funding Source Choice between Bank and Financial Market Financing, working paper, . , S. and E. , (1991), Economies of Superscale in , Applied Economics, 23, 283-293. , H.C., (1936), Rules versus Authorities in Monetary Policy, , 44, 1-30. Productivity in an International Perspective Supplement number 28 to the Government Inquiry on the International Competitiveness of the Swedish Financial Sector. Views, suggestions, and opinions expressed in this study represent the personal views of the authors and not necessarily those of the Government Inquiry on the International Competitiveness of the Swedish Financial Sector. * Professor i Nationalekonomi vid , . forskar inom områdena produktivitet och effektivitet samt energiekonomi och avreglering av marknader. , , P.O.Box 640, SE-405 30 , . Volym D:258 Supplement 28 Kort sammanfattning (in Swedish) ..................................................... Measurement of efficiency and productivity change.................. Interpretation of efficiency scores and productivity change...... Swedish branch office productivity change ............................. 3.2Swedish banking efficiency and productivity change 1984- The efficiency of Swedish banking in 1996............................. Banking productivity in a Scandinavian comparison ............... The efficiency of Swedish banks in a European comparison.... Sammanfattning (in Swedish) Syftet med denna rapport är att analysera den relativa effektiviteten och produktivitetsutvecklingen inom svensk bankverksamhet. Rapporten inehåller dels en redovisning av ett antal tidigare studier av svensk bankverksamhet, dels vissa nya resultat. På metodsidan utnyttjas olika typer av frontfunktionsanalys, speciellt s.k. stokastiska frontfunktioner samt (Data Envelopment Analysis). Det stora problemet vid mätning av banksektorns produktivitet är hur produktionen ska definieras och mätas. Utgör inlåningskonton input eller output i bankverksamheten? Mäts banktjänster bäst genom antalet konton och transaktioner eller värdet på dessa? Är hanterandet av konton verkligen den mest betydelsefulla prestationen i bank-verksamhet? Är det inte istället bankernas roll som förmedlare av kredit från sparare till investerare som, samhällsekonomiskt sett, är den viktigaste prestationen? Och hur ska i så fall denna mätas? Vid analys av bankers produktion är det två huvudansatser som dominerar i litteraturen med avseende på vilka aspekter som studeras: produktionsansats (tjänste- eller förädlingsvärdeansats) förmedlingsansats (tillgångsansats) I produktionsansatsen betraktas banker som producenter av inlåning, utlåning och andra tjänster med hjälp av arbetskraft och kapital. I denna ansats utgör antalet inlåningskonton, antal utestående lån, antal valutatransaktioner etc. outputvariabler. I förmedlingsansatsen betraktas banker som hopsamlare av kapital som sedan omvandlas och förmedlas till lån och andra tillgångar. Volymen i kronor på inlåningskonton och utlåning utgör här output och rörelsekostnader och räntor input i produktionsprocessen. Någon exakt klar gräns mellan de två ansatserna existerar dock inte, utan valet av variabler bestäms nog oftare av tillgängligheten snarare än av ansatsen. En viktig fråga är hur skillnader i effektivitet mellan produk- tionsenheter ska tolkas. Det är då viktigt att notera att effektivitet som det här definierats är ett mått på avståndet från en enhet till en best- practice front och inte ett mått på någon högre form av effektivitet. Det är också viktigt att notera att vi här endast beaktar resursinsats och produktion i mer eller mindre fysiska termer. Effekter av varierande produktpriser eller faktorpriser, lönsamhet eller avkastning ligger utanför analysen. Med vissa reservationer kan vi säga att en effektivitetsanalys Volym D:260 Supplement 28 kan ge en indikation på enheternas relativa konkurrenskraft på en konkurrensutsatt marknad. Detta innebär att inom starkt reglerade sektorer eller sektorer med svag konkurrens kan korrelationen mellan effektivitet och lönsamhet vara mycket svag. Goda finansiella nyckeltal kan lika gärna vara ett uttryck för monopol-makt som för effektivitet Rapportens huvudresultat kan sammanfattas på följande sätt: Det existerar ingen generell samsyn i litteraturen när det gäller definitionen av vad som ska klassificeras som producerade tjänster i bankverksamhet och vad som är att betrakta som insatsfaktorer. Det finns en stor variation mellan olika studier. Även inom de två dominerande ansatserna, produktionsansatsen och förmedlingsan- satsen finns det en betydande variation i val av tjänsteproduk- tionsvariabler och insatsfaktorsvariabler. Eftersom de empiriska resultaten inte tycks vara speciellt robusta när det gäller val av variabler på output- och inputsidan utgör naturligtvis detta ett problem vid tolkningen av de empiriska resultaten och vid jämförelser mellan olika undersökningar. Ett generellt resultat när det gäller bankeffektivitet och produk- tivitetsförändringar är att resultaten tycks vara mycket känsliga för variationer i servicevolymerna, dvs. I de studier som uppmärksammas i denna rapport gäller det speciellt för produktivitetsförändringar på bankkontors-nivån, där produktiviteten varierar mycket starkt mellan åren, väl korrelerad med variationer i tjänstevolymen. Detta visar sig också vara fallet efter bankkrisen. Produktivitetsutvecklingen på fronten övergår i en produktivitetstillbakagång efter 1992. A priori skulle man förvänta sig en kraftig rationaliseringsfas med snabb produktivitetsökning. Det som förklarar resultaten är istället den anpassning av hushållens och företagens portföljer som blev resultatet av den kraftiga ökningen i realräntan med omfattande återbetalning av lån och lägre efterfrågan på nya lån. Bankerna hade uppenbarligen inte mö jlighet att anpassa arbetskraft och andra insatsfaktorer i proportion till förändringarna på tjänstevolymsidan. Effektivitetsanalysen av de svenska bankerna 1996 illustrerar resultatens känslighet med avseende på valet av variabler. Å ena sidan visar sig valet mellan arbetskraftskostnader och arbetstimmar ha endast obetydlig effekt på effektivitetsfördelningen. Å andra sidan visar sig resultaten vara mycket känsliga för inlemmandet eller utelämnandet av nettoprovisioner som en tjänstevariabel. Medan resultaten för de kommersiella bankerna inte påverkas nämnvärt har denna variabel mycket stor effekt på ett antal sparbankers effektivitetsmått. I ett skandinaviskt perspektiv var den svenska banksektorn 1990 betydligt mera produktiv än såväl den finska som den norska och danska banksektorn. Denna slutsats gäller också för de största bankerna. Det stora gapet mellan svensk och finsk genomsnitts- produktivitet beror i huvudsak på effektivitetskomponenten, även om också hade ett teknologiskt försteg. Vid en jämförelse mellan ett stort antal europeiska affärsbanker visar sig den genomsnittliga effektivitetsnivån för de svenska affärsbankerna ligga på andra plats från botten, både i en två- faktormodell och i en arbetseffektivitetsmodell. Det är då viktigt att här komma ihåg att analysen är begränsad endast till ett antal affärsbanker i varje land samt till ett fåtal variabler. I allmänhet visar det sig vara mycket stor variation i effektivitet mellan olika banker både inom och mellan länder. Jämfört med många andra branscher kan man också à priori förvänta sig en lägre effektivitet och en större spridning i effektivitet i banksektorn och ett större avstånd mellan de mest effektiva och de minst effektiva bankerna. En viktig orsak till detta är det relativt låga konkurrens- trycket i banksektorn i kombination med en blandning av banker med olika typer av ägare och målsättningar, affärsbanker, kooperativa banker och stiftelser utan vinstsyfte, börsnoterade och icke börsnoterade företag. Närliggande orsaker är också den reglerings- struktur som bankerna möter i olika länder och som ytterligare kan öka avståndet mellan de mest effektiva och minst effektiva enheterna. Vid en bedömning av den svenska banksektorns internationella konkurrenskraft kan konstateras att samtliga länder uppvisar en stor spridning mellan de mest effektiva och de minst effektiva bankerna. Å andra sidan tyder resultaten på att den svenska banksektorns genomsnittsproduktivitet är relativt låg jämfört med övriga EU- länders. I ett nordiskt perspektiv tycks dock den svenska bank- sektorns produktivitet klart överstiga såväl den finska som den norska och i vissa fall även den danska. Volym D:262 Supplement 28 In this report we have briefly surveyed and to some extent extended a couple of empirical studies on Swedish banking efficiency and productivity change on the basis of frontier production function methods. The results may be summarised in the following way: In the literature, there is no general agreement on the definition of outputs and inputs in banking, and there is a lot of variation between different studies. Even within each of the two dominant approaches, the production approach (or service provision or value added approach) and the intermediation approach (or asset approach), there is substantial variation Moreover, the empirical results do not seem very robust, but rather depend upon the definition of outputs and inputs – although rather few studies have dealt with this issue. In general, banking efficiency and productivity change seem to be very sensitive to fluctuations in output variables, i.e., in capacity utilisation. This is most evident in the case of productivity change at branch offices, which shows high variation between years, strongly correlated with output variation. This is also evident in the years after the banking crisis, when technical change at the frontier turns into regress, from 1992 onwards. As a response to a banking crisis, this may seem counter intuitive. However, it turns out that the result, to a large extent, is driven by the development of output. A major reason for the banking crisis was the dramatic increase in the real rate of interest, causing large changes in household and company portfolios, with extensive repayment of loans and less demand for new loans.