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Efficiency and cost differences across countries in a unified European banking market

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J.A. Bikker

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Abstract

The efficiency of European banks is crucial in the light of the current and expected increase in competition. This paper seeks to discover the level and spread of bank efficiency in Europe. In particular, it focuses on differences across countries, various sizes of banks (reflecting several market segments), various banking categories and over time. It considers two related but diverging dimensions of efficien cy. X-efficiency measures managerial ability, whereas cost level differences reflect national economic and institutional conditions with respect to supervisory rules, government interference, customer preferences and level of development. Cost levels of banks in Luxembourg appear to be 20% below the European average and cost levels in Spain and Greece are, respectively, 25% and 35% higher. The X-inefficiency results are similar, be it that the spread is somewhat less. Large banks are twice as inefficient as small banks; apparently, shortcomings in managerial ability are manifested earlier in large financial institutions. Inefficiencies in 1997 are nearly 45% lower than in 1990; evidently, over time, deregulation, liberalisation and ongoing financial and monetary integration in the EU have increased competitive pressures and enforced European banks to operate more economically. The analysis provides evidence that X-efficiency estimates from single-country studies, as often found in the literature, can be very misleading. The large spread in inefficiencies and cost levels indicates that the process of scaling up and rationalisation to be prepared for increased foreign competition, is for at least part of the banks only still in its early stage.

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Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 34.

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Date of creation: Jan 2001
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Handle: RePEc:dnb:ressup:34

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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. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. J.A. Bikker, 2001. "Efficiency and cost differences across countries in a unified European banking market," Research Series Supervision (discontinued) 34, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
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  4. Lozano-Vivas, Ana, 1998. "Efficiency and Technical Change for Spanish Banks," Applied Financial Economics, Taylor and Francis Journals, vol. 8(3), pages 289-300, June. [Downloadable!] (restricted)
  5. Pastor, JoseManuel & Perez, Francisco & Quesada, Javier, 1997. "Efficiency analysis in banking firms: An international comparison," European Journal of Operational Research, Elsevier, vol. 98(2), pages 395-407, April. [Downloadable!] (restricted)
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  6. 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!]
  7. 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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  8. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 655-672, May. [Downloadable!] (restricted)
  9. 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.
  10. 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!]
  11. J.A. Bikker, 1999. "Efficiency in the European banking industry: an exploratory analysis to rank countries," Research Series Supervision (discontinued) 18, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
  12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  13. Maudos, Joaquin & Pastor, Jose M, 2001. "Cost and Profit Efficiency in Banking: An International Comparison of Europe, Japan and the USA," Applied Economics Letters, Taylor and Francis Journals, vol. 8(6), pages 383-87, June. [Downloadable!] (restricted)
  14. Maudos, Joaquin & Pastor, Jose M & Seranno, Lorenzo, 1999. "Economic Integration, Efficiency and Economic Growth: The European Union Experience," Applied Economics Letters, Taylor and Francis Journals, vol. 6(6), pages 389-92, June. [Downloadable!] (restricted)
  15. J.A. Bikker & K. Haaf, 2000. "Competition, concentration and their relationship: an empirical analysis of the banking industry," Research Series Supervision (discontinued) 30, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
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  16. 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!]
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  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. 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!]
    Other versions:
  4. J.W.B. Bos & C.J.M. Kool, 2004. "Bank Efficiency the Role of Bank Strategy and Local Market Conditions," DNB Working Papers 002, Netherlands Central Bank, Research Department. [Downloadable!]
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  5. Trevor Fitzpatrick & Kieran McQuinn, 2005. "Labour Cost Efficiency in UK and Irish Credit Institutions," The Economic and Social Review, Economic and Social Studies, vol. 36(1), pages 45–66. [Downloadable!]
  6. Sophocles N. Brissimis & Matthaios D. Delis & Efthymios G. Tsionas, 2006. "Technical and Allocative Efficiency in European Banking," Working Papers 46, Bank of Greece. [Downloadable!]
  7. Mark Schonewille, 2004. "Qualitative Efficiency Assessment of Markets: An Institutional Approach to Training," HEW 0405006, EconWPA. [Downloadable!]
  8. Jaap W. B. Bos & Heiko Schmiedel, 2006. "Is there a single frontier in a single European banking market?," Working Paper Series 701, European Central Bank. [Downloadable!]
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