b~aqThis paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate, and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research, and managerial performance. Areas needing additional research are also outlined. q The opinions expressed do not necessarily reflect those of the Board of Governors or its staff. The authors thank Sigbjorn Berg, Bill Cooper, Gary Ferrier, Joaquin Maudos, and Jesus Pastor for insightful comments on earlier drafts and Knox Lovell for bringing us up to date on stochastic DEA. We also thank Seth Bonime and Emilia Bonaccorsi for outstanding research assistance. * Fmc iencv of Financial lnstit~ons: International Survev a nd Direction s for Future Researc h I introductionThe first task in evaluating the performance of financial institutions is to separate those production units that by some standard perform well from those that perform Poorly. This is done by applying nonparametric or parametric frontier analysis to firms within the financial industry or to branches within a financial firm. The information obtained can be used either:(1) to inform government policy by assessing the effects of deregulation, mergers, or market structure industry, different on efficiency; (2) to address research issues by describing the efficiency of an ranking its firms, or checking how measured efficiency may be related to the efficiency techniques employed; or (3) to improve managerial performance by identifying "best practices" and "worst practices" associated with high and low measured efficiency, respectively, and encouraging the former practices while discouraging the latter.At its heart, frontier analysis is essentially a sophisticated way to "benchmark" the relative performance of production units. Most financial institutions, with varying degrees of success, benchmark themselves and/or use industry consultants to perform this task. The power of frontier analysis is twofold. First, it permits individuals with very little institutional . knowledge or experience to select "best practice" firms within the industry (or 'best practice" branches within the firm), assign numerical efficiency values, broadly identify areas of input overuse and/or output underproduction, and relate these results to questions of government policy or academic research interest. Second, in the hands of individuals with sufficient institutional background, frontier analysis permits management to objectively identify areas of best practice within complex service operations, a determination not always possible with traditional benchmark...

This paper surveys 130 studies that apply frontier efficiency analysis to financial institutions in 21 countries. The primary goals are to summarize and critically review empirical estimates of financial institution efficiency and to attempt to arrive at a consensus view. We find that the various efficiency methods do not necessarily yield consistent results and suggest some ways that these methods might be improved to bring about findings that are more consistent, accurate, and useful. Secondary goals are to address the implications of efficiency results for financial institutions in the areas of government policy, research, and managerial performance. Areas needing additional research are also outlined.

We propose a set of consistency conditions that frontier efficiencymeasures should meet to be most usefd for re@atory analysis or other purposes. The efficiency estimates shotid be consistent in their efficiency levels, rankings, and identification of best and worst fus, consistent over time and with competitiveconditions in the market, and consistent with standard nonfrontier measures of performance. We provide evidence on these conditions by evaluating and comparing efficiency estimates on U.S. bank efficiency from variants of all four of the major approaches-DEA, SFA, TFA, and DFA-and fmd mixed results.

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