Mortgage Loan Demand and Banks’ Operational Efficiency

Using data for 6,740 U.S. banks from 1996 to 2016, we consider whether mortgage loan demand is a key determinant of banks’ cost efficiency and management quality. We estimate mortgage loan demand from loan-level applications at individual banks, and we estimate bank efficiency and management quality score from banks’ structural models. In line with theoretical considerations around economies of scale, our results show that loan amount demand improves cost efficiency, but the number of loan applications reduces cost efficiency. In contrast, mortgage loan demand has an economically less significant effect on management quality score. We also find that loan demand is an important factor in shaping banks’ loan quality, above and beyond operational efficiency.