Financial center productivity and innovation prior to and during the financial crisis

Abstract

This paper assesses and tests the response of banks operating in financial centers to the financial crisis by investigating the actual productivity change and its components—pure efficiency change, scale efficiency change and technological change (innovation). The heterogeneity in the organizational form and size of banks has been represented with the Aggregated Malmquist Productivity Index (Zelenyuk in Eur J Oper Res 174:1076–1086, 2006) and the bootstrap techniques (Simar and Wilson in Eur J Oper Res 115:459–471, 1999) extended to this index. Our findings indicate that both branch and subsidiary banks respond to the financial crisis with productivity improvements and, in both cases, this improvement is driven primarily by a positive technical change. However, the branch banks outperform the subsidiary banks. In addition, for the three categories of big, medium and small banks, we find a positive productivity reaction to the crisis, driven by a technical change. However, because small banks not only respond to the financial crisis with improvements in the technical change but also in the scale efficiency change, they appear to reach a higher productivity growth, compared with larger banks, as a response to the financial crisis.