Abstract
This study investigates the learning curve of commercial banks regarding the efficiency of credit and value creation. However, current empirical methods for accessing the learning curve in organizations are not suitable for use in financial institutions. Considering bank-specific characteristics, we introduce a dynamic learning curve using a cost function adjusted to capture learning-by-doing in banks. Using the model, we test several hypotheses on the impact of bank intermediary experience (learning) on the efficiency of credit and value creation in Japanese commercial banks. The findings show that bank intermediary learning significantly improves the cost efficiency gain in the gross value created, total credit created, and investment. However, bank intermediary experience has no significant effect on the efficiency of the economic value created for all the banks analyzed. These findings have practical implications for evaluating cost dynamics in bank credit and value creation, risk management, lending to the real sector, and shareholder value creation.
Highlights
There is a growing body of evidence suggesting that bank experience could contribute to improved bank performance
Our findings show that bank intermediary experience significantly accounts for cost efficiency gain in loan production, security investment, and gross value added (GVA)
Value creation To measure the learning curve of banks in the domain of value creation, we identified two outputs: economic value added (EVA) (∅ eva ), and GVA (FISIM, ∅fisim) . 8 By definition, EVA captures shareholder value; EVA is arguably the most reliable value-based measurement tool used to measure shareholder value creation in banking because it adjusts for the opportunity cost of capital, reflecting the true economic profit created
Summary
There is a growing body of evidence suggesting that bank experience could contribute to improved bank performance. A study by Bush (2015) found that bank operating experience could create a mechanism that reduces the cost of producing financial services and improves the efficiency of the banking sector. The rationale is that bank production [intermediation] experience resulting from the sustained effort in value addition and asset transformation processes create knowledge that lowers the cost of producing financial services and improves bank performance [efficiency]. The process of creating these specialized financial commodities may include risk management (Berger and Humphrey 1992), service/utility provision (Grigorian and Manole 2006), and value addition (Drake et al 2006). These processes involve extensive documentation, information gathering, monitoring, and other inputs that incur substantial costs. Organizational learning literature suggests that cost efficiency could be associated with production experience (Argote 2012)
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