BANK EFFICIENCY DERIVED FROM THE PROFIT FUNCTION

Both input and output inefficiencies are derived from a profit functio n for US banks. These inefficiencies are decomposed into allocative an d technical components in a new way using shadow prices. About half of all potential variable profits are estimated to be lost to inefficien cy. Most inefficiencies are from deficient output revenues, rather tha n excessive input costs. Larger banks are found to be more efficient t han smaller banks, which may offset scale diseconomies found elsewhere . Tests of a new concept, 'optimal scope economies', suggest that join t production is optimal for most banks, but that specialization is opt imal for others.