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Productivity changes in pre-crisis Western European banks: Does scale effect really matter?

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  • Lee, Chi-Chuan
  • Huang, Tai-Hsin

Abstract

Insofar as the completion of the Single Market for Financial Services, it has presented new challenges for European Banking industries. In this study, we use a recently developed generalized metafrontier Malmquist productivity index (gMMPI) to provide insights on productivity growth. We extend the gMMPI to broaden the index's capacity by decomposing various sources of productivity change in the metafrontier context. The sample contains commercial banks from 12 Western European countries prior to the recent financial crisis. A key advantage of our extension is that it introduces the role of scale effects. The empirical results show that an average bank's productivity growth arises mainly from technical changes and scale effects. Moreover, smaller and larger banks grow faster than medium ones. In addition, conservative banks tend to grow faster. These findings suggest that a more competitive and integrated financial market induced by financial deregulation is indeed able to improve banks’ productivity.

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  • Lee, Chi-Chuan & Huang, Tai-Hsin, 2016. "Productivity changes in pre-crisis Western European banks: Does scale effect really matter?," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 29-48.
  • Handle: RePEc:eee:ecofin:v:36:y:2016:i:c:p:29-48
    DOI: 10.1016/j.najef.2015.11.005
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    2. Zeguang Li & Keqiang Hou & Simon Cottrell, 2018. "Do Listed Banks have Higher Operating Efficiency and Output Efficiency?," Australian Economic Papers, Wiley Blackwell, vol. 57(3), pages 309-326, September.
    3. Chi‐Chuan Lee & Tai‐Hsin Huang, 2019. "What Causes The Efficiency And The Technology Gap Under Different Ownership Structures In The Chinese Banking Industry?," Contemporary Economic Policy, Western Economic Association International, vol. 37(2), pages 332-348, April.
    4. Khan, Habib Hussain & Kutan, Ali M. & Naz, Iram & Qureshi, Fiza, 2017. "Efficiency, growth and market power in the banking industry: New approach to efficient structure hypothesis," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 531-545.
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    More about this item

    Keywords

    Metafrontier Malmquist productivity index; Technical efficiency change; Scale effects; Catch-up;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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