Technical inefficiency and output scale in banking and industry

What would the effect on bank leverage and industry production be if a weighted average of profit and inefficiency reduction were maximized in a perfectly competitive environment? The answer to this question by this note is that technical inefficiency unrelated to problem loans on the part of banks, would result in loan expansion, inducing, in turn, firms that rely heavily on bank borrowing, to expand their production accordingly as they can benefit from higher lending. Increased scale of production fosters economies of scale, which can compensate for the adverse effects of technical inefficiency on cost, reinforcing at the same time sales. Production can expand even further if firms maximize their profit by acknowledging their own technical inefficiency.