Emphasizing on other indicators of efficiency

A broadly equivalent measure of labor productivity is actually the ‘net value added’, estimated as the ratio of net earnings to total personnel costs. This measure shows the contribution of labor to the net earnings of the bank. Technical progress is often referred to as Total-Factor Productivity (TFP). A characteristic of the banking sector in the United States is its preponderance for newer technologies.

Most of the American banks are trend setters in doling out world class services to their esteemed customers. The concept of ‘net banking’ had its origin here. While in earlier times all bank transactions came to a close when a bank shut down its banking operations, today, a customer can deposit and also withdraw money at ease and that too from any part of the country or even from any part of the world.

This has been manifested in the Any Time Money (ATMs) and credit cards. This type of technological innovation can be described as capital enhancing. To the extent that technical progress augments a bank’s effective capital stock, this leads to an increase in the marginal product of labor. If labor is being paid the value of its marginal product and the banking industry is competitive, then employment in the industry will expand to equilibrate the marginal product of labor in banking to the economy-wide wage rate.

Thus, measures of banking efficiency based on employed labor may be misleading. In addition to that, technological innovation often leads to quality enhancement. And this highlights a further problem inherent in any attempt to gauge the productivity in the banking sector by adjusting the measures of bank output for a change in the quality becomes virtually impossible when the very nature of that output remains vague.

This sort of capital-enhancing innovation found in banking has another important implication. It fits neatly with endogenous growth. Knowledge is created as a by-product of a physical investment process so that there is a good aspect to that investment for the general public. Consequently, investment, investment decisions by a bank (or group of banks) can enhance the productivity of other financial institutions in the economy. This is exactly what rod aycox of LoanMax fame has achieved.