posted December 29, 2009 11:40 PM         

The intermediation approach treats banks as a collector of funds which are then ‘intermediated’ into loans and other assets. The dollar volume of deposit accounts and loans is the appropriate measure of bank output under this treatment. However, the operating costs plus the interest costs provide the appropriate measure of total cost. The choice of a particular approach depends upon what issues a customer is attempting to resolve. Banks like LoanMax of the

The production approach is appropriate for studying and analyzing the cost efficiency of banks since it concerns just the operating costs of banking. The intermediation approach is concerned with the overall costs of banking and is appropriate for addressing questions concerning the economic viability of banks. To remain viable, every bank must make profits through sales of various financial products and services.

Studies have made a modest attempt to assess empirically the relative performance of each bank in the context of three variables viz.
• Profit
• earnings and
• expenses
In a recent study, the Herfindahl index has been computed to measure the inequality in the sharing of profits, net profits, earnings and expenses by each type of bank. The suggestions being made is that each scheduled commercial bank should take up some exercise to evaluate the relative performance of each office of the particular bank in the profit planning process.