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A Comparative Study of Efficiency in European Banking

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  • Barbara Casu
  • Philip Molyneux

Abstract

The structure of European banking markets has substantially changed over the past decade, partially as a result of the creation of the Single Internal Market. The process of integration and accompanying deregulation has embodied an incentive for bank management to focus on improving efficiency, especially given the more competitive banking environment. In this paper, employing the non-parametric DEA approach, we investigate whether the productive efficiency of European banking systems has improved and converged towards a common European frontier between 1993 and 1997, following the process of EU legislative harmonisation. We also examine the determinants of European bank efficiency using a Tobit regression model approach. We then extend the established literature on the determinants bank efficiency by taking into account the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem a bootstrapping technique is applied. Overall, the results suggest that since the EU's Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. Efficiency differences across European banking markets appear to be mainly determined by country-specific factors.

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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-17.

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Date of creation: Feb 2000
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Handle: RePEc:wop:pennin:00-17

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Keywords: Efficiency; DEA; Bootstrap; European Banks.;

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  1. Simar, L., 1991. "Estimating efficiencies from frontier models with panel data: a comparison of parametric, non-parametric and semi-parametric methods with boot strapping," CORE Discussion Papers 1991026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of Financial Institutions: International Survey and Directions for Future Research," Center for Financial Institutions Working Papers 97-05, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Francisco Pérez García & Javier Quesada Ibañez & Joaquín Maudos Villarroya & José Manuel Pastor Monsálvez, 1999. "- Cost And Profit Efficiency In European Banks," Working Papers. Serie EC 1999-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  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.
  5. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
  6. 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.
  7. Bhattacharyya, Arunava & Lovell, C. A. K. & Sahay, Pankaj, 1997. "The impact of liberalization on the productive efficiency of Indian commercial banks," European Journal of Operational Research, Elsevier, vol. 98(2), pages 332-345, April.
  8. 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.
  9. Ana Lozano Vivas & Jesús Tadeo Pastor Ciurana & José Manuel Pastor Monsálvez, 1997. "Efficiency of European banking systems: A correction by environment variables," Working Papers. Serie EC 1997-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  10. Mei Xue & Patrick T. Harker, 1999. "Overcoming the Inherent Dependency of DEA Efficiency Scores: A Bootstrap Approach," Center for Financial Institutions Working Papers 99-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
  11. Léopold Simar & Paul W. Wilson, 1998. "Sensitivity Analysis of Efficiency Scores: How to Bootstrap in Nonparametric Frontier Models," Management Science, INFORMS, vol. 44(1), pages 49-61, January.
  12. S. Carbo & E. P. M. Gardener & J. Williams, 2003. "A note on technical change in banking: the case of European savings banks," Applied Economics, Taylor & Francis Journals, vol. 35(6), pages 705-719.
  13. Joaquin Maudos & Jose Pastor, 2001. "Cost and profit efficiency in banking: an international comparison of Europe, Japan and the USA," Applied Economics Letters, Taylor & Francis Journals, vol. 8(6), pages 383-387.
  14. Berg, Sigbjorn Atle & Forsund, Finn R. & Hjalmarsson, Lennart & Suominen, Matti, 1993. "Banking efficiency in the Nordic countries," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 371-388, April.
  15. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
  16. repec:fth:louvco:9543a is not listed on IDEAS
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