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Chapter 12: Costs and Efficiency in Banking: A Survey of the Evidence from the US, the UK and Japan
12. Costs and eﬃciency in banking: a survey of the evidence from the US, the UK and Japan Leigh Drake 1 INTRODUCTION The aim of this chapter is to provide a selective summary of some of the main academic research into the issue of costs and eﬃciency in banking, and to set this analysis within the context of the major changes taking place in banking markets around the world. To facilitate this, we focus on three important banking markets, the US, the UK and Japan. We also present a brief overview of some of the alternative methodologies employed by researchers in the study of various aspects of bank eﬃciency. 2 A BRIEF OVERVIEW OF TRENDS IN THE UK, US AND JAPANESE FINANCIAL MARKETS Banking markets around the world have been subject to an enormous degree of structural change since the early 1980s. This structural change has been associated with: increasing competition, both within and across sectors, and from the capital market; the impact of new technology, which is facilitating competition from new entrants; deregulation; increased diversiﬁcation and merger activity and, more recently in the UK, the demutualization of segments of both the life assurance and building society industries. These trends have impacted forcefully on the UK banking sector. Following the intensiﬁcation of competition in both corporate sector lending and international banking in the late 1970s, UK banks sought to diversify their business in order to maintain their proﬁtability. In 1981, for example, UK banks...
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