A COMPARATIVE ANALYSIS OF THE PERFORMANCE OF CANADIAN AND U.S. BANKS FROM 2005 TO 2013 USING THE STOCHASTIC FRONTIER APPROACH

Abstract

To understand why the U.S. banking system collapsed but the Canadian one did not during 2007-08 financial crisis, I first review the history of U.S. and Canadian banking system regulations. The review suggests that the regulators in these two systems have two different perspectives on improving efficiency: U.S. policy has emphasized efficiency gains due to competition while Canadian policy has emphasized scale economies. Next, the Stochastic Frontier Approach was used to measure and compare the technical inefficiency of 12 U.S. banking holding companies with 6 Canadian banks from 2005 to 2013. The average technical inefficiency of Canadian and U.S. banks were almost the same during this period. This suggested that the respective performances are similar between, at least with respect to cost efficiency of those banks with similar assets. As such, this thesis provides support for the hypothesis that the cause of the different relative performances was not cost efficiency.