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Efficiency and profitability of European banks: how important is operational efficiency?

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  • Werner, Karl
  • Moormann, Jürgen

Abstract

Most previous research on efficiency in banking takes a regulatory perspective. In contrast, this paper investigates the empirical relation between efficiency and profitability in five large economies of the European Union during the period 1998-2005 and discusses the results from the perspective of corporate bank strategy. Methodologically the existing literature is expanded by the use of DEA super-efficiency values to regress profitability, the incorporation of risk by calculative costs of capital, and a model specification built on the modern understanding of banks as centers of value creation. The results of the conducted static and dynamic regression analyses show that profitable banks operate with higher technical efficiency than their competitors. Furthermore, the strategic environment and in this regard the structure and concentration of the national financial sector have a considerable impact on a bank's financial performance. Both issues proved to be statistically and economically significant. Thus, the results support the appropriateness of the generic strategy of cost leadership for the European banking market. Banks following this strategic position were able to achieve higher excess returns during the analyzed period. --

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Bibliographic Info

Paper provided by Frankfurt School of Finance and Management in its series Frankfurt School - Working Paper Series with number 111.

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Date of creation: 2009
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Handle: RePEc:zbw:fsfmwp:111

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Keywords: Banks; corporate strategy; efficiency; operational efficiency; profitability;

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References

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  1. Bikker, Jacob A. & Haaf, Katharina, 2002. "Competition, concentration and their relationship: An empirical analysis of the banking industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(11), pages 2191-2214, November.
  2. Elena Beccalli & Barbara Casu & Claudia Girardone, 2006. "Efficiency and Stock Performance in European Banking," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 33(1-2), pages 245-262.
  3. Nayantara D. Hensel, 2006. "Cost-efficiencies, profitability, and strategic behavior: evidence from Japanese commercial banks," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 2(1), pages 49-76, January.
  4. Goddard, John & Molyneux, Phil & Wilson, John O S, 2004. "Dynamics of Growth and Profitability in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 1069-90, December.
  5. Joshua Kirkwood & Daehoon Nahm, 2005. "Australian Banking Efficiency and its Relation to Stock Returns," Research Papers, Macquarie University, Department of Economics 0508, Macquarie University, Department of Economics.
  6. Barbara Casu & Claudia Girardone, 2006. "Bank Competition, Concentration And Efficiency In The Single European Market," Manchester School, University of Manchester, University of Manchester, vol. 74(4), pages 441-468, 07.
  7. Nicola Cetorelli, 1999. "Competitive analysis in banking: appraisal of the methodologies," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q I, pages 2-15.
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Cited by:
  1. Yu, Xiaofan, 2011. "A spatial interpretation of the persistency of China's provincial inequality," Frankfurt School - Working Paper Series 171, Frankfurt School of Finance and Management.

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