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Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach

  • Laura Cavallo
  • Stefania Rossi
Registered author(s):

    The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers.

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    Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

    Volume (Year): 8 (2002)
    Issue (Month): 1 ()
    Pages: 123-146

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    Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:123-146
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    1. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245.
    2. Stevenson, Rodney E., 1980. "Likelihood functions for generalized stochastic frontier estimation," Journal of Econometrics, Elsevier, vol. 13(1), pages 57-66, May.
    3. 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.
    4. Allen, Linda & Rai, Anoop, 1996. "Operational efficiency in banking: An international comparison," Journal of Banking & Finance, Elsevier, vol. 20(4), pages 655-672, May.
    5. Allen N. Berger & Loretta J. Mester, 1997. "Inside the black box: what explains differences in the efficiencies of financial institutions?," Working Papers 97-1, Federal Reserve Bank of Philadelphia.
    6. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
    7. Michel Dietsch & Ana Lozano Vivas, . "How the Environment Determines the Efficiency of Banks: A Comparison between French and Spanish Banking Industry," Center for Financial Institutions Working Papers 97-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
    8. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
    9. Hunter, William C & Timme, Stephen G, 1995. "Core Deposits and Physical Capital: A Reexamination of Bank Scale Economies and Efficiency with Quasi-Fixed Inputs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 165-85, February.
    10. Allen N. Berger & David B. Humphrey, 1990. "The dominance of inefficiencies over scale and product mix economies in banking," Finance and Economics Discussion Series 107, Board of Governors of the Federal Reserve System (U.S.).
    11. 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.
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