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Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?

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  • J.W.B. Bos
  • J.W. Kolari

Abstract

This paper employs stochastic frontier cost and profit models to estimate economies of scale as well as X-efficiency for multi-billion dollar European and U.S. banks in the period 1995-1999. Empirical results with respect to separate analyses of large European and U.S. banks are strikingly similar with decreasing (increasing) cost (profit) returns to scale. We find that large banks in Europe and the U.S. have cost and profit functions that are similar with increasing returns to scale and decreasing (increasing) scope economies for the cost (profit) model. Further analyses evaluate the reasonableness of estimating a combined cost or profit frontier for European and U.S. banks. We find that, while a single profit frontier may exist, separate cost frontiers are implied. Although profitability in absolute terms is equal, large U.S. banks tend to exhibit higher average profit efficiency than European banks on average. Moreover, banks in the U.S. are more profit efficient than banks in most individual European countries. We conclude that the empirical results tend to support the notion that potential efficiency gains are possible via geographic expansion of large European and U.S. banks.

Suggested Citation

  • J.W.B. Bos & J.W. Kolari, 2003. "Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?," Research Series Supervision (discontinued) 61, Netherlands Central Bank, Directorate Supervision.
  • Handle: RePEc:dnb:ressup:61
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    References listed on IDEAS

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    Keywords

    X-efficiency; scale; scope; distance; banking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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