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Comparing Efficiency in European Banking: a Meta Frontier Approach

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  • J.W.B. Bos
  • H. Schmiedel

Abstract

A 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 Info

Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 57.

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Date of creation: May 2003
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Handle: RePEc:dnb:ressup:57

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Keywords: x-efficiency; stochastic frontiers; banking; meta-frontiers;

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Cited by:
  1. Koutsomanoli-Filippaki, Anastasia & Mamatzakis, Emmanuel C., 2010. "Estimating the speed of adjustment of European banking efficiency under a quadratic loss function," Economic Modelling, Elsevier, vol. 27(1), pages 1-11, January.
  2. Chiu, Yung-ho & Luo, Zhengying & Chen, Yu-Chuan & Wang, Zebin & Tsai, Min-Pei, 2013. "A comparison of operating performance management between Taiwan banks and foreign banks based on the Meta-Hybrid DEA model," Economic Modelling, Elsevier, vol. 33(C), pages 433-439.
  3. Bos, J.W.B. & Kool, C.J.M., 2006. "Bank efficiency: The role of bank strategy and local market conditions," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1953-1974, July.
  4. Ariff, Mohamed & Can, Luc, 2008. "Cost and profit efficiency of Chinese banks: A non-parametric analysis," China Economic Review, Elsevier, vol. 19(2), pages 260-273, June.
  5. Bos, Jaap W. B. & Heid, Frank & Koetter, Michael & Kolari, James W. & Kool, Clemens J. M., 2005. "Inefficient or just different? Effects of heterogeneity on bank efficiency scores," Discussion Paper Series 2: Banking and Financial Studies 2005,15, Deutsche Bundesbank, Research Centre.
  6. Luiz Chabalgoity & Emerson Marinho & Mauricio Benegas & Paulo de M. Jorge Neto, 2005. "The Impact Of De-Regulamentation On The Brazilian Banking Industry: A Production Metafrontier Approach," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 093, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  7. Julien Reynaud & Rofikoh Rokhim, 2005. "Do banking crises enhance efficiency ? A case study of 1994 Turkish and 1997 Indonesian crises," Cahiers de la Maison des Sciences Economiques bla05007, Université Panthéon-Sorbonne (Paris 1).
  8. Jacob A. Bikker & Jaap W.B. Bos, 2005. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," SUERF Studies, SUERF - The European Money and Finance Forum, number 2005/2 edited by Morten Balling.
  9. Mamatzakis, E & Koutsomanoli, A, 2009. "European Banking Integration under a Quadratic Loss Function," MPRA Paper 19379, University Library of Munich, Germany.
  10. repec:hal:journl:halshs-00193306 is not listed on IDEAS

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