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Efficiency and cost differences across countries in a unified European banking market

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  • J.A. Bikker

Abstract

The efficiency of European banks is crucial in the light of the current and expected increase in competition. This paper seeks to discover the level and spread of bank efficiency in Europe. In particular, it focuses on differences across countries, various sizes of banks (reflecting several market segments), various banking categories and over time. It considers two related but diverging dimensions of efficien cy. X-efficiency measures managerial ability, whereas cost level differences reflect national economic and institutional conditions with respect to supervisory rules, government interference, customer preferences and level of development. Cost levels of banks in Luxembourg appear to be 20% below the European average and cost levels in Spain and Greece are, respectively, 25% and 35% higher. The X-inefficiency results are similar, be it that the spread is somewhat less. Large banks are twice as inefficient as small banks; apparently, shortcomings in managerial ability are manifested earlier in large financial institutions. Inefficiencies in 1997 are nearly 45% lower than in 1990; evidently, over time, deregulation, liberalisation and ongoing financial and monetary integration in the EU have increased competitive pressures and enforced European banks to operate more economically. The analysis provides evidence that X-efficiency estimates from single-country studies, as often found in the literature, can be very misleading. The large spread in inefficiencies and cost levels indicates that the process of scaling up and rationalisation to be prepared for increased foreign competition, is for at least part of the banks only still in its early stage.

Suggested Citation

  • J.A. Bikker, 2001. "Efficiency and cost differences across countries in a unified European banking market," Research Series Supervision (discontinued) 34, Netherlands Central Bank, Directorate Supervision.
  • Handle: RePEc:dnb:ressup:34
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    References listed on IDEAS

    as
    1. J.A. Bikker, 2001. "Efficiency and cost differences across countries in a unified European banking market," Research Series Supervision (discontinued) 34, Netherlands Central Bank, Directorate Supervision.
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    Cited by:

    1. J.A. Bikker, 2001. "Efficiency and cost differences across countries in a unified European banking market," Research Series Supervision (discontinued) 34, Netherlands Central Bank, Directorate Supervision.
    2. J.A. Bikker & J. Gorter, 2008. "Performance of the Dutch non-life insurance industry: competition, efficiency and focus," Working Papers 08-01, Utrecht School of Economics.
    3. Jacob A. Bikker & Jaap W.B. Bos, 2005. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," SUERF Studies, SUERF - The European Money and Finance Forum, number 2005/2 edited by Morten Balling.
    4. Mark Schonewille, 2004. "Qualitative Efficiency Assessment of Markets: An Institutional Approach to Training," HEW 0405006, University Library of Munich, Germany.
    5. Christian E. Weller & Ghazal Zulfiqar, 2013. "Financial Market Diversity and Macroeconomic Stability," Working Papers wp332, Political Economy Research Institute, University of Massachusetts at Amherst.
    6. Bos, J.W.B. & Kool, C.J.M., 2006. "Bank efficiency: The role of bank strategy and local market conditions," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1953-1974, July.
    7. Bank for International Settlements, 2006. "The banking system in emerging economies: how much progress has been made?," BIS Papers, Bank for International Settlements, number 28, January.
    8. Mamatzakis, E & Koutsomanoli, A, 2009. "Risk in the EU banking industry and efficiency under quantile analysis," MPRA Paper 22492, University Library of Munich, Germany.
    9. Dániel Holló & Márton Nagy, 2006. "Bank Efficiency in the Enlarged European Union," BIS Papers chapters,in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 217-35 Bank for International Settlements.
    10. Bos, Jaap W. B. & Schmiedel, Heiko, 2006. "Is there a single frontier in a single European banking market?," Working Paper Series 701, European Central Bank.
    11. Trevor Fitzpatrick & Kieran McQuinn, 2005. "Labour Cost Efficiency in UK and Irish Credit Institutions," The Economic and Social Review, Economic and Social Studies, vol. 36(1), pages 45-66.
    12. Lozano-Vivas, Ana & Pastor, Jesús T., 2010. "Do performance and environmental conditions act as barriers for cross-border banking in Europe?," Omega, Elsevier, vol. 38(5), pages 275-282, October.
    13. Fitzpatrick, Trevor & McQuinn, Kieran, 2004. "Cost Efficiency in UK and Irish Credit Institutions," Research Technical Papers 3/RT/04, Central Bank of Ireland.
    14. Bos, J.W.B. & Schmiedel, H., 2007. "Is there a single frontier in a single European banking market?," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2081-2102, July.
    15. Mamatzakis, E & Koutsomanoli, A, 2009. "European Banking Integration under a Quadratic Loss Function," MPRA Paper 19379, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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