Sizing up performance measures in the financial services sector

Abstract

The adequate performance of banks, insurers and pension funds is of crucial importance to their private and business customers. The prices and quality of financial products sold by such entities are largely determined by operational efficiency and the degree of competition in the markets concerned. Since efficiency and competition cannot be observed directly, various indirect measures in the form of simple indicators or more complex models have been devised and used both in economic theory and in business practice. This paper demonstrates that measuring the performance of financial institutions is no simple matter and that indicators differ strongly in quality. It investigates which methods are to be preferred and how by combining certain indicators stronger measures may be developed. These measures are then subjected to a predictive validity test.