The Bankwatch

Tracking the consumer evolution of financial services

Canadian Banks have a Productivity Gap relative to the US

Following up on the previous post covering the Bank of Canada’s view that Canadian Banks do not have a productivity gap [pdf 19 pages] relative to US Banks, here is the basis for that contention within a 2006 report.

The conclusion copied here in whole is in my view, woefully misleading and contradictory. It reads to me like someone with political motivations has turned facts into something that meets policy objectives. Analysis to follow.

This work examines the efficiency and productivity of Canadian and U.S. banks in three ways.

First, we compare key performance ratios and find that (i) the average Canadian bank employee produces more assets than the average U.S. bank employee, and (ii) in terms of producing net operating revenue, Canadian and U.S. bank workers are similarly productive.

Second, we investigate whether there are economies of scale in the cost functions of Canadian banks and a sample of U.S. BHCs. We find larger economies of scale for Canadian banks than for the U.S. BHCs. This suggests that Canadian banks are less efficient with regard to the scale of their operations and would have more to gain in terms of efficiency benefits from becoming larger.

Third, we measure cost-inefficiency in Canadian banks and in U.S. BHCs relative to the domestic efficient frontier in each country (the domestic
best-practice institution). We find that Canadian banks are closer to the domestic efficient frontier than are the U.S. BHCs, and that they have moved closer to that efficient frontier over time.

Overall, these results do not suggest relative efficiency or productivity gaps in the Canadian banking industry. On the contrary, Canadian banks compare generally favourably.

Finally, as noted above, legislative and regulatory changes have benefited efficiency in Canadian financial services. This shows the importance of removing any remaining restrictions that inhibit competition and efficiency, but provide little (or no) benefit in terms of financial soundness.

Some facts from their report:

  • Expense ratio Canada – 67 cents per dollar of revenue
  • Expense ratio US – 59 cents per dollar of revenue
  • Assets per employee Canada – $6.1M
  • Assets per employee US – $4.1M
  • operating revenue per employee US/ Canada same at $0.3M

This from the report:

Our analysis indicates that the difference in the expense ratios can be currently attributed to a higher labour cost component (wages and benefits) at Canadian banks. However, this differential does not imply disparities in productivity, which concerns how much output is produced per unit of input (typically, labour).

Relevance to Bankwatch:
Translation. Bank of Canada views Canadian Banks as productive by taking the narrow view of relative employee output. However that view excludes the overall budget of banks that includes real estate, and technology. The latter points explain the overall expense disparity per dollar of revenue earned at a significant 8 cents.

In other words productivity is a measure of investment not of employees. That is the entire point of automation. This further explains the contradictory point in he Tim Lane Kingston speech that wrote off StatsCan concerns for Canadian Bank productivity.

Productivity is a measure of inputs (expenses) and outputs (revenue). Any narrower view does a disservice to the country and the Banks, covering over potential areas for concern. Banks in Canada cover a large geography with relatively small population and while internet adoption is high the related savings in real estate and technology efficiency have yet to be achieved.

Written by Colin Henderson

August 29, 2009 at 17:25

Posted in economy

Tagged with , , ,

%d bloggers like this: