The cost efficiency of the U.S. small banks after the 2008 global financial crisis

Abstract

This paper examines the relative cost efficiency of U.S. small banks after the 2008 Global Financial Crisis (2008 GFC). Using financial information from 10,495 of the same small banks operating from 2010 to 2021, we examine the after-effects of the recent global financial crises on the U.S. small banks. The study uses Data Envelopment Analysis (DEA) to calculate the overall efficiency using yearly and pooled data. The overall efficiency measure is then decomposed into allocative, technical, pure-technical, and scale efficiency to better understand the sources of small banks’ inefficiencies. The results indicate that the overall efficiency of small banks operating in the U.S. after the 2008 GFC has been continuously low until 2021. The source of the low level of overall efficiency has been the low level of technical efficiency rather than allocative efficiency. In turn, the basis of the low level of technical efficiency has been pure technical and scale efficiency. Understanding the origins of cost inefficiencies in small banks has implications for micro and macro policymaking. Examining the underlying causes of cost inefficiencies in small banks after the financial crisis can inform policymakers in devising strategies to improve banks’ cost efficiency.

Keywords

• U.S. small banks
• efficiency
• financial crisis
• G21
• G29
• C61