Profits, efficiency and Irish banks
LUCEY, BRIAN MICHAEL
This paper looks at the interaction between profits and efficiency in a sample of 17
Irish banks, for the years 1988 - 1991 inclusive. By contrast with previous
techniques used for assessing economic models of efficiency, the method employed
allows for a finer decomposition of profit loss. This loss can be attributed to
allocative or technical inefficiency, and these can be derived both for inputs and
outputs.
Relying on the use of shadow prices, as it does, this technique allows us to make
some interesting observations about the relative availability of firm-specific data in
different research regimes.
The results of the modelling process indicate that there is a substantial degree of loss
arising in the Irish banking system. This is estimated as being an amount equal to
approximately 20 per cent of the total realised profit. Most of the loss arises from
input technical inefficiency i.e. poor planning on the input side of the production
process. A by-product of the process is a new test for economies of scope; there is
no evidence from the data that there are economies of scope for Irish banks. This is
in line with previous findings.
Read before the Society, 18 November 1993 - This lecture is delivered under the auspices of the Harrington Trust (founded by the
bequest of John Harrington, Esq.) with the collaboration of the Journal of the
Statistical and Social Inquiry Society of Ireland.
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