The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘productivity

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 , , ,

Financial markets did not detect the deterioration of structural productivity trends in the early 2000s early enough

A fascinating analysis of economic conditions prior to 2007, sugesting that dropping productivity and the concurrent increase in asset prices contributed at least in part to the economic crisis, yet was not picked up by the market.

Productivity and the crisis: Revisiting the fundamentals | Vox

Most narratives of the crisis start with problems in the financial sector that then spilled over into the real economy. This column looks at the real side first and shows that labour productivity growth declined significantly in the years prior to the crisis, particularly in the US construction sector. Financial markets may have failed in that they didn’t detect the deterioration of structural productivity trends in the early 2000s.

Written by Colin Henderson

August 14, 2009 at 15:29

Posted in economy

Tagged with , ,

Deloitte report | “The Shift Index: Recession masking long-term competitive challenges”

Deloitte put out some good stuff, but this one is superlative.  The context here is is for planners thinking about the future and wondering how to think about the future.  That context is hard to achive with so much information, and so much new information every day.  For example we have all seen and heard the Iran/ Twitter discussion, and impacts here and here.  We have seen government influence Twitter to keep the ‘people influence’ moving.  We see internet advancing rapidly, Google supposedly taking over advertising, yet Facebook with over 200M users, actively resisting advertising.  We see online banking growing rapidly, yet banks are stuck with expensive branches and staff in them.  We see concerns about bandwidth yet it grows inexorably.  We see PR and Marketing continually trying to force fit old methods into new models with little success.

These are simply examples that point to the understandable confusion both for planners, and for the people they must show their plans to.  Everyone is a participant personally as well as corporately in the 21st Century changes, and we need better mental models to work it through.

In short there are too many data points, and too many of them are seemingly contradictory.  One thing we all agree on is that things are changing, yet what is happening, and how can I make rational projections within these changing times that support planning for the next 2 – 20 years?

Enter this new paper from Deloitte with a well constructed index that looks at three indexes they refer to as waves:

The Shift Index:  Recession masking long-term competitive challenges | Deloitte Center for the Edge [121 page pdf link off this page]

Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index is focused on three sets of main indicators:

* Foundations, which set the stage for major change
* Flows of resources, such as knowledge, which allows businesses to enhance productivity
* Impacts, which help gauge progress at an economy-wide level

Index data points – click through for detail.


This paper resonated with me because it offers a simple model that is understandable, yet when I study the detail in behind, it captures the host of data points that provide the confusion and contradictions.  It deals front and centre with the reality that corporations, including banks, are not exploiting the digital infrastructure that is presented not the new capital, talent and knowledge flows that are present.

In simple terms the model has three waves, with the first two being drivers of change, and the third being the corporate outcomes.  The current situation is, understandably that, the impact wave is lagging the first two waves.  In short companies are failing to react and explout the opportunities offerred by the new digital infrastructure and knowledge flows that are available.  The result is more of what they refer to as toppling – companies failing.  They also note the recession is masking the longer term shift that is really happening.  This document screams – plan for the future, not the recession.


Written by Colin Henderson

June 23, 2009 at 12:29

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