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Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?

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  • J.W.B. Bos
  • J.W. Kolari

Abstract

This paper employs stochastic frontier cost and profit models to estimate economies of scale as well as X-efficiency for multi-billion dollar European and U.S. banks in the period 1995-1999. Empirical results with respect to separate analyses of large European and U.S. banks are strikingly similar with decreasing (increasing) cost (profit) returns to scale. We find that large banks in Europe and the U.S. have cost and profit functions that are similar with increasing returns to scale and decreasing (increasing) scope economies for the cost (profit) model. Further analyses evaluate the reasonableness of estimating a combined cost or profit frontier for European and U.S. banks. We find that, while a single profit frontier may exist, separate cost frontiers are implied. Although profitability in absolute terms is equal, large U.S. banks tend to exhibit higher average profit efficiency than European banks on average. Moreover, banks in the U.S. are more profit efficient than banks in most individual European countries. We conclude that the empirical results tend to support the notion that potential efficiency gains are possible via geographic expansion of large European and U.S. banks.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 61.

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Date of creation: Jul 2003
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Handle: RePEc:dnb:ressup:61

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Keywords: X-efficiency; scale; scope; distance; banking;

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Cited by:
  1. Michiel Bijlsma & Machiel van Dijk & Marc Pomp & Cora Zonderland, 2005. "Competition in markets for life insurance," CPB Document 96, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Cristian Barra & Sergio Destefanis & Giuseppe Lubrano Lavadera, 2013. "Regulation and the Crisis: The Efficiency of Italian Cooperative Banks," CSEF Working Papers 338, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Pasiouras, Fotios, 2008. "Estimating the technical and scale efficiency of Greek commercial banks: The impact of credit risk, off-balance sheet activities, and international operations," Research in International Business and Finance, Elsevier, vol. 22(3), pages 301-318, September.
  4. Bos Jaap W.B. & Ling Chan Yee & Kolari James W & Yuan Jiang, 2010. "Competition and Critical Mass," Research Memorandum 063, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. M. Koetter, 2005. "Evaluating the German Bank Merger Wave," Working Papers 05-16, Utrecht School of Economics.
  6. Kevin Davis, 2007. "Banking Concentration, Financial Stability and Public Policy," RBA Annual Conference Volume, in: Christopher Kent & Jeremy Lawson (ed.), The Structure and Resilience of the Financial System Reserve Bank of Australia.
  7. Feng, Guohua & Serletis, Apostolos, 2010. "Efficiency, technical change, and returns to scale in large US banks: Panel data evidence from an output distance function satisfying theoretical regularity," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 127-138, January.
  8. Michiel van Leuvensteijn & J.A. Bikker, 2005. "An exploration into competition and efficiency in the Dutch life insurance industry," CPB Discussion Paper 48, CPB Netherlands Bureau for Economic Policy Analysis.
  9. Rossi, Stefania P.S. & Schwaiger, Markus S. & Winkler, Gerhard, 2009. "How loan portfolio diversification affects risk, efficiency and capitalization: A managerial behavior model for Austrian banks," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2218-2226, December.
  10. Lozano-Vivas, Ana & Pasiouras, Fotios, 2010. "The impact of non-traditional activities on the estimation of bank efficiency: International evidence," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1436-1449, July.
  11. Chakraborty, Suparna & Allen, Linda, 2007. "Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord," MPRA Paper 1805, University Library of Munich, Germany.
  12. Mohanty, Sunil K. & Lin, Winston T. & Lin, Hong-Jen, 2013. "Measuring cost efficiency in presence of heteroskedasticity: The case of the banking industry in Taiwan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 77-90.
  13. Dan Luo & Shujie Yao, . "World Financial Crisis and the Rise of Chinese Commercial Banks," Discussion Papers 09/08, University of Nottingham, GEP.
  14. Bos, Jaap W. B. & Schmiedel, Heiko, 2006. "Is there a single frontier in a single European banking market?," Working Paper Series 0701, European Central Bank.

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