© 2010 Collegium Basilea & AMSI Journal of Biological Physics and Chemistry 10 (2010) 111–119 Received 27 August 2010; accepted 30 September 2010 111 18RA10A ________________________________________________________________________________________________________ 1. INTRODUCTION The existence of an efficient banking sector is a fundamental prerequisite for economic growth. Banks manage the asymmetry of information that exists between households and firms. In essence, if such an asymmetry did not exist presumably savers would lend money directly to firms. Therefore, banks offer a wide range of services, which enables them to absorb “surplus” money (via personal savings accounts), and redistribute it as credit to companies, with which they can develop the capital-intensive parts of their businesses. In a sense, then, banking underpins the overall operation of the economy, since practically all parts of a developed economy depend on the concentration of capital. Examining the structure of the banking sector (and, a fortiori, how efficient banks are at managing informational asymmetry) is therefore of fundamental importance for understanding the performance of the entire economy. Despite globalization, transnational comparisons are still of great importance. Individual nations continue to be largely autonomous, not least as regards banking (for example, practically all of them have their own independent central bank). Underlying the desire of the banks to promote a strong economy is the persistence of transnational competition as a fundamental driving force of human activity. As a reflexion of this importance, extensive data on banks (their assets, liabilities, profits etc.) are collected annually (e.g. [1]). From mere inspection of this kind of data, however, it is very difficult to draw any kind of absolute inference. Some banks are larger than others, some have higher profits, lending ratios, and so forth. For those banks quoted on the stock exchange, their share prices and trends presumably reflect a kind of consensus concerning the worth of the banks. But one has very little idea of the efficiency of the banking system of a country as a whole. Traditionally, it is presumed to be efficient if the economy of that nation is successful—as reflected in a high GDP per capita. Following this line of reasoning, the country with the highest GDP per capita (Switzerland) might be assumed to have the world’s most efficient banking system. 1 Such a relative comparison, however, gives no clue about the underlying factors that contribute to efficiency, which ministers of finance and others would very much like to grasp. 2 Moreover some of the traditional methods of analysis are questionable in terms of predictive power. An excellent illustration of this weakness is the failure to have predicted the subprime mortgage crisis in the USA, which has had important repercussions in many other countries of the world. Indeed, although the rôle played by banks in the economy is widely believed to be understood, at least in a general, Ranking banks, and classifying national banking systems according to their cybernetic efficiency Jeremy J. Ramsden, †,* Catarina Figueira ‡ and Joseph G. Nellis ‡ † School of Applied Sciences, Cranfield University, Bedfordshire MK43 0AL, UK ‡ School of Management, Cranfield University, Bedfordshire MK43 0AL, UK The paper investigates efficiency in national banking systems by fitting the so-called simple canonical law, a generalization of Zipf’s law, to publicly available data. This law is expected to be applicable to any system that is optimizing the cost of delivery of outcomes under the constraint of a fixed quantity of outcome. The parameters required to fit the data are the cybernetic temperature and a “competitivity parameter”, reflecting dynamical and structural aspects respectively. A novel classification of banking systems emerges from a comparison of the data from different countries. Additional qualitative insight emerges from examining the variation of the parameters during the last few years. A key finding of the analysis is that underlying structural strength and weakness can be revealed, features which, as recent financial turbulence has shown, may remain hidden in conventional analysis. Keywords: assets, competitivity, cybernetic temperature, dynamics, niches, structure, Zipf’s law * Corresponding author. Tel.: +44 1234 754100, fax: +44 1234 751346. E-mail: j.ramsden@cranfield.ac.uk 1 We could refer to the whole financial system but for the purpose of this paper we shall concentrate on analysis of the banking sector. 2 GDP per capita also depends on features essentially beyond human control, such as the abundance of natural resources, the prevailing climate, and the intelligence of the population.