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Efficiency in the European banking industry: an exploratory analysis to rank countries

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Author Info
J.A. Bikker

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Abstract

The introduction of the Euro in EMU is enhancing international competition between European banks, forcing banks to become more efficient. Which countries will be effected the most? The stochastic cost frontier approach is used to estimate the X-efficiency of the European banks, and a multiproduct translog cost function to compare cost levels. On average, Spanish, French and Italian banks appear to be less efficient than those in Germany, the Netherlands and the UK, while banks in Luxembourg, Belgium and Switzerland are the most efficient. Large differences in average X-inefficiencies and cost-levels between countries exist, Spain being around 40% above and Luxembourg about 35% below the European average. Large-scale consolidation and rationalisation of the banking industry are expected. Furthermore, the analysis provides evidence that X-efficiency estimates from single-country studies, as often found in the literature, can be very misleading.

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Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 18.

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Date of creation: May 1999
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Handle: RePEc:dnb:ressup:18

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
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  2. J.A. Bikker & J.M. Groeneveld, 1998. "Competition and Concentration in the EU Banking Industry," Research Series Supervision (discontinued) 8, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
  3. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  4. Altunbas, Y. & Gardener, E. P. M. & Molyneux, P. & Moore, B., 2001. "Efficiency in European banking," European Economic Review, Elsevier, vol. 45(10), pages 1931-1955, December. [Downloadable!] (restricted)
  5. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 317-347, April. [Downloadable!] (restricted)
  6. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  7. Battese, George E. & Corra, Greg. S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December. [Downloadable!]
  8. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June. [Downloadable!] (restricted)
  9. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July. [Downloadable!] (restricted)
  10. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(4), pages 926-54, November.
  11. Berger, Allen N. & Humphrey, David B., 1991. "The dominance of inefficiencies over scale and product mix economies in banking," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 117-148, August. [Downloadable!] (restricted)
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  12. Simon H. Kwan & Robert A. Eisenbeis, 1996. "An analysis of inefficiencies in banking: a stochastic cost frontier approach," Economic Review, Federal Reserve Bank of San Francisco, pages 16-26. [Downloadable!]
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  13. David C. Wheelock & Paul W. Wilson, 1993. "Explaining bank failures: deposit insurance, regulation, and efficiency," Working Papers 1993-002, Federal Reserve Bank of St. Louis. [Downloadable!]
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  14. Loretta J. Mester, 1996. "Measuring efficiency at U.S. banks: accounting for heterogeneity is important," Working Papers 96-11/R, Federal Reserve Bank of Philadelphia. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J.A. Bikker, 2003. "Efficiency and Cost Differences across Countries in a Unified EuropeanBanking Market," DNB Staff Reports (discontinued) 87, Netherlands Central Bank. [Downloadable!]
    Other versions:
  2. Jacob Bikker & Janko Gorter, 2008. "Performance of the Dutch non-life insurance industry: competition, efficiency and focus," DNB Working Papers 164, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  3. Abdelaziz Rouabah, 2002. "Economies d?échelle, économies de diversification et efficacité productive des banques luxembourgeoises : une analyse comparative des frontières stochastiques sur données en panel," BCL working papers 3, Central Bank of Luxembourg. [Downloadable!]
  4. Jacob Bikker & Jaap Bos, 2004. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," DNB Working Papers 018, Netherlands Central Bank, Research Department. [Downloadable!]
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  5. Gabe de Bondt & Benoit Mojon & Natacha Valla, 2005. "Term structure and the sluggishness of retail bank interest rates in euro area countries," Working Paper Series 518, European Central Bank. [Downloadable!]
  6. L.W. Punt & M.C.J. van Rooij, 1999. "The profit-structure relationship, efficiency and mergers in the European banking industry: an empirical assessment," WO Research Memoranda (discontinued) 604, Netherlands Central Bank, Research Department. [Downloadable!]
  7. Marques Ibanez, David & Molyneux, Philip, 2002. "Integration of European Banking and Financial Markets," EIFC - Technology and Finance Working Papers 14, United Nations University, Institute for New Technologies. [Downloadable!]
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  8. Emili Tortosa-Ausina, 2002. "Cost Efficiency and Product Mix Clusters across the Spanish Banking Industry," Review of Industrial Organization, Springer, vol. 20(2), pages 163-181, March. [Downloadable!] (restricted)
  9. José Pastor & Lorenzo Serrano, 2006. "The Effect of Specialisation on Banks' Efficiency: An International Comparison," International Review of Applied Economics, Taylor and Francis Journals, vol. 20(1), pages 125-149, January. [Downloadable!] (restricted)
  10. J.A. Bikker & A.A.T. Wesseling, 2003. "Intermediation, integration and internationalisation: a survey on banking in Europe," Research Series Supervision (discontinued) 53, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
  11. D. Jansen & J. de Haan, 2003. "Increasing concentration in european banking: a macro-level analysis," WO Research Memoranda (discontinued) 743, Netherlands Central Bank, Research Department. [Downloadable!]
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