Measuring Performance of Banks: An Assessment

Adequate performance of financial institutions is of crucial importance to their customers. Prices and quality of their products are determined by efficiency and competition. Since efficiency and competition cannot be observed directly, various indirect measures in the form of simple indicators or complex models have been devised and used both in theory and in practice. This article demonstrates that measuring the performance of banks is hard 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 subjected to a predictive validity test.