Comparing Efficiency in European Banking: a Meta Frontier Approach
AbstractA persistent paradox in stochastic frontier efficiency research is that we cannot compare the X-efficiency of firms without assuming these firms to operate under a common frontier. In this paper, we address this imbalance by constructing so-called metafrontiers. Specifically, we build on recent advances by Battese et al. (2002) in enveloping regional frontiers. First, we estimate country-specific and common cost and profit frontiers. Second, we apply a type of envelope that provides a good fit for a meta-frontier. Using a data set of more than 5000 large commercial banks from all major European banking markets over the period 1993-2000, the application of meta-frontiers enables us to assess the existence of a single European banking market. Empirical evidence supports the view that traditional efficiency techniques based on pooled frontier efficiency scores tend to underestimate cost and profit efficiency levels resulting in biased cross-country comparisons.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 57.
Date of creation: May 2003
Date of revision:
x-efficiency; stochastic frontiers; banking; meta-frontiers;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
This paper has been announced in the following NEP Reports:
- NEP-EEC-2003-07-13 (European Economics)
- NEP-EFF-2003-07-29 (Efficiency & Productivity)
- NEP-FIN-2003-07-13 (Finance)
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