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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.

Suggested Citation

  • Werner, Karl & Moormann, Jürgen, 2009. "Efficiency and profitability of European banks: how important is operational efficiency?," Frankfurt School - Working Paper Series 111, Frankfurt School of Finance and Management.
    • Handle: RePEc:zbw:fsfmwp:111
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    References listed on IDEAS

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    More about this item

    Keywords

    Banks; corporate strategy; efficiency; operational efficiency; profitability;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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