A study of efficiency and structural change in banking: lessons from Australian example

Abstract

The efficiency in the banking industry has been the prime concern for the Australian government for years. To achieve this objective the government undertook a process of deregulation in the 1980’s and have since then allowed foreign competition into the domestic banking market for the first time. The first few years of deregulation saw unprecedented growth in the banking industry. At the same time great technological innovation allowed for greater output from a given amount of resources. The process was gradual, but its effects seem to have come into force since 1991–1992. The purpose of this article is to test whether or not a hypothesized structural change happened during 1991–1992. Although the historical data used is old but the results still are of theoretical interest. In literature there are two approaches used to test efficiency in banking, the production and the intermediation approach, this article follows intermediation approach. Two models are fitted to the observed data by using a functional form, where we considered the output a function of possible inputs. It was found that the structural change in banking industry shown by decreasing number of employees and smaller branch networks is tentatively confirmed by running regression analysis for prior and post change.