December 1998
Federal Reserve Bank of Dallas

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Concentration, Technology, and Market Power in Banking: Is Distance Dead?
Robert R. Moore

Advancing technology is reducing the barrier that distance has traditionally posed between potential buyers and sellers for a variety of goods and services. To what extent will technology overcome distance as a barrier in banking? Consistent with distance becoming less of a barrier and banking markets becoming larger in geographic scope, I find that the presence of nearby competitors helps explain bank profitability in 1986 and 1987 but not in 1996 and 1997. Hence, while it may be premature to pronounce distance dead in banking, its role does appear to be diminishing.

Benchmarking the Productive Efficiency of U.S. Banks
Thomas F. Siems and Richard S. Barr

Effective benchmarking allows comparisons among similar business units to discover best practices and incorporate process and product improvements into ongoing operations. Most current benchmarking analyses are limited in scope by taking a one-dimensional view of a service, product, or process and by ignoring any interactions, substitutions, or trade-offs between key variables. In this study, we use a constrained-multiplier, input-oriented, data envelopment analysis (DEA) model to benchmark the productive efficiency of U.S. banks. We find that the most efficient banks effectively control costs and hold a greater percentage of earning assets than the least efficient banks. Performance measures for the most efficient banks indicate that they earn a significantly higher return on average assets, hold more capital, and manage less risky and smaller loan portfolios. We find a close association between a bank’s relative efficiency score derived from the DEA model and its examination (CAMEL) rating.