Thursday , January 28 2021
Home / Amol Agrawal: Mostly Economics / The cost efficiency improvement of Norwegian banks can be explained by automation and digitalisation

The cost efficiency improvement of Norwegian banks can be explained by automation and digitalisation

Summary:
Henrik Andersen of Norges Bank (Norway Central Bank) in this paper shows benefits of automation and digitalisation on banks: Operating costs in the Norwegian banking sector have been reduced considerably in recent decades, both as a share of income and assets. This has increased banks’ resilience to increased losses and reduced the risk of crises. In this article, I analyse how costs have been reduced and the main drivers of the cost efficiency improvement. The results suggest that automation and the digitalisation of banks’ operations have played a key role in improving cost efficiency. …  Our dataset shows that Norwegian banks have reduced all large cost items relative to assets. Nearly half of the decline in cost-to-assets ratios is due tobanks’ reduction of wage and personnel

Topics:
Amol Agrawal considers the following as important: , , ,

This could be interesting, too:

Amol Agrawal writes Can the United States Postal Service (USPS) improve financial inclusion? Insights from USPS history..

Amol Agrawal writes The Republicans’ Fake Budget Hawks

Amol Agrawal writes Monetary Policy Transparency and Anchoring of Inflation Expectations in India

Amol Agrawal writes Qualitative Field Research in Monetary Policy Making

Henrik Andersen of Norges Bank (Norway Central Bank) in this paper shows benefits of automation and digitalisation on banks:

Operating costs in the Norwegian banking sector have been reduced considerably in recent decades, both as a share of income and assets. This has increased banks’ resilience to increased losses and reduced the risk of crises. In this article, I analyse how costs have been reduced and the main drivers of the cost efficiency improvement. The results suggest that automation and the digitalisation of banks’ operations have played a key role in improving cost efficiency.

… 
Our dataset shows that Norwegian banks have reduced all large cost items relative to assets. Nearly half of the decline in cost-to-assets ratios is due to
banks’ reduction of wage and personnel expenses relative to assets, which primarily reflects a reduction in the number of employees. The decline in the
cost-to-assets ratio has been dampened by the average wage of bank employees, which has risen faster than the average wage in Norway. Other
operating costs have also fallen relative to assets, among other reasons, as a result of the reduction in the number of bank offices. Increased costs for
external services and IT has restrained the decline in cost-to-assets ratios. 
To ascertain the primary drivers of improvements in Norwegian banks’ cost efficiency, I have estimated a model for developments in the cost-to-assets
ratio using a number of indicators from theory and literature. The modelexplains cost developments well. According to the model, automation and
digitalisation have reduced the cost-to-assets ratio, while more extensive and complex regulation have contributed to keeping the cost-to-income ratio
elevated. In addition, the results suggest that lower economic activity lowers the cost-to-income ratio and vice versa. 
Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

Leave a Reply

Your email address will not be published. Required fields are marked *