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The efficiency and the conduct of European banks: Developments after 1992

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  • Schure, Paul
  • Wagenvoort, Rien
  • O'Brien, Dermot

Abstract

We assess the efficiency of the European banking sector in the 5‐year period following the implementation of the Second Banking Directive of the European Union (EU). We first determine the degree of cost efficiency of EU banks in 1993–1997. After that, we explore to what extent efficient European banks are managed differently than their inefficient peers. Our datasets comprise 5 years of observations on 1347 savings and 873 commercial banks. We use the new recursive thick frontier approach (RTFA) method to establish our results. We find that structural factors, such as technological progress or increased bank competition, have lowered the cost base of banks by about 5% annually during the sample period. Managerial inability to control costs (X‐inefficiency) is with 17–25% the main source of bank inefficiency in the EU. Managerial efficiency varies a great deal within Europe, and there seems to be no tendency towards convergence. We find that small savings banks can exploit economies of scale. The EU savings bank sector would cut costs by about 3% if small savings banks merged.
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  • Schure, Paul & Wagenvoort, Rien & O'Brien, Dermot, 2004. "The efficiency and the conduct of European banks: Developments after 1992," Review of Financial Economics, Elsevier, vol. 13(4), pages 371-396.
  • Handle: RePEc:eee:revfin:v:13:y:2004:i:4:p:371-396
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    2. Mikko MAKINEN & Derek C. JONES, 2015. "Comparative Efficiency Between Cooperative, Savings And Commercial Banks In Europe Using The Frontier Approach," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 86(3), pages 401-420, September.
    3. Jéfferson Colombo & Peter Wanke & Jorge Antunes & Abul Kalam Azad, 2022. "Unveiling endogeneity between competition and efficiency in European banks: a robust econometric-neural network approach," SN Business & Economics, Springer, vol. 2(3), pages 1-46, March.
    4. Francesco Aiello & Graziella Bonanno, 2018. "On The Sources Of Heterogeneity In Banking Efficiency Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 194-225, February.
    5. Francesco Aiello & Graziella Bonanno, 2016. "Efficiency in banking: a meta-regression analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 112-149, January.
    6. Berglund, Tom & Mäkinen, Mikko, 2016. "Learning from financial crisis: the experience of Nordic banks," Research Discussion Papers 30/2016, Bank of Finland.
    7. Schure, Paul & Wagenvoort, Rien & O'Brien, Dermot, 2004. "The efficiency and the conduct of European banks: Developments after 1992," Review of Financial Economics, Elsevier, vol. 13(4), pages 371-396.
    8. Vaneet Bhatia & Sankarshan Basu & Subrata Kumar Mitra & Pradyumna Dash, 2018. "A review of bank efficiency and productivity," OPSEARCH, Springer;Operational Research Society of India, vol. 55(3), pages 557-600, November.
    9. Barros, Carlos Pestana & Ferreira, Candida & Williams, Jonathan, 2007. "Analysing the determinants of performance of best and worst European banks: A mixed logit approach," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2189-2203, July.
    10. Barros, Carlos Pestana & Wanke, Peter, 2014. "Banking efficiency in Brazil," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 54-65.
    11. Mitra Khaksar & Mir Mohammad Ali Malakoutian, 2020. "Productivity Evaluation for Banking System in Developing Countries: DEA Malmquist Productivity Index Based on CCR, BCC, CCR-BCC (A Case Study)," Post-Print hal-03221338, HAL.
    12. Weill, Laurent, 2009. "Convergence in banking efficiency across European countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 818-833, December.
    13. Osuagwu, Eze Simpson & Isola, Wakeel & Nwaogwugwu, Isaac, 2018. "Measuring Technical Efficiency and Productivity Change in the Nigerian Banking Sector: A Comparison of non-parametric DEA and parametric SFA," MPRA Paper 112948, University Library of Munich, Germany.
    14. Berglund, Tom & Mäkinen, Mikko, 2019. "Do banks learn from financial crisis? The experience of Nordic banks," Research in International Business and Finance, Elsevier, vol. 47(C), pages 428-440.
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    16. Wagenvoort, Rien J.L.M. & Ebner, André & Morgese Borys, Magdalena, 2011. "A factor analysis approach to measuring European loan and bond market integration," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 1011-1025, April.
    17. Carbo Valverde, Santiago & Humphrey, David B. & Lopez del Paso, Rafael, 2007. "Do cross-country differences in bank efficiency support a policy of "national champions"?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2173-2188, July.
    18. Drobetz, Wolfgang & Erdmann, Thomas & Zimmermann, Heinz, 2007. "Predictability in the cross-section of European bank stock returns," Working papers 2007/21, Faculty of Business and Economics - University of Basel.
    19. Luis Alberiko Gil-Alana & Carlos Barros & Dercio Mandlaze, 2017. "A performance assessment of Mozambique banks: a Bayesian stochastic frontier," Applied Economics, Taylor & Francis Journals, vol. 49(45), pages 4579-4587, September.
    20. Wagenvoort, Rien, 2003. "BANK SURVEY EVIDENCE ON "BANK LENDING TO SMEs IN THE EUROPEAN UNION"," Economic and Financial Reports 2003/1, European Investment Bank, Economics Department.
    21. Wagenvoort, Rien & Ebner, André & Morgese Borys, Magdalena, 2009. "EFR 2009-01 A factor analysis approach to measuring European loan and bond market integration," Economic and Financial Reports 2009/1, European Investment Bank, Economics Department.
    22. Pasiouras, Fotios & Kosmidou, Kyriaki, 2007. "Factors influencing the profitability of domestic and foreign commercial banks in the European Union," Research in International Business and Finance, Elsevier, vol. 21(2), pages 222-237, June.
    23. Lee, Chi-Chuan & Huang, Tai-Hsin, 2017. "Cost efficiency and technological gap in Western European banks: A stochastic metafrontier analysis," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 161-178.
    24. Wael Moustafa Hassan, 2013. "Efficiency of the Middle East Banking Sector ¨CA Non Parametric Approach: A Comparative Analysis between Islamic and Conventional Banks," Business and Management Research, Business and Management Research, Sciedu Press, vol. 2(4), pages 116-128, December.
    25. Ulaş Ünlü & Neşe Yalçın & Nuri Avşarlıgil, 2022. "Analysis of Efficiency and Productivity of Commercial Banks in Turkey Pre- and during COVID-19 with an Integrated MCDM Approach," Mathematics, MDPI, vol. 10(13), pages 1-22, July.

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