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Economies of Scale and Efficiency in European Banking: New Evidence

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  • Wagenvoort, Rien

    () (European Investment Bank, Economic and Financial Studies)

  • Schure, Paul

    (European University Institute in Florence)

Abstract

This paper investigates the cost efficiency of 1974 credit institutions across 15 European countries over the five-year period following the implementation of the Second Banking Directive in 1993. The Recursive Thick Frontier Approach is employed to estimate a Augmented Cobb-Douglas cost frontier that allows banks of different types, in different periods, and belonging to different size categories, to operate at different costs per unit of assets. As size economies are exhausted at a balance sheet total of EUR 600 million, we do not find major economic gains from economies of scale for the overall European banking industry. However, the saving bank sector may reduce average costs with roughly 6% by choosing an optimal size for its institutions. No impact of technological progress on the average costs of the full sample of X-efficient banks could be detected but managerial efficient saving banks reduced average costs with 9% during our sample period. The most important reason for inefficiencies in the European banking is managerial inability to control costs. Although in some countries such as the UK and The Netherlands cost reductions were rapidly achieved, the average level of X-inefficiency of European banks still exceeded 16% in 1997.

Suggested Citation

  • Wagenvoort, Rien & Schure, Paul, 1999. "Economies of Scale and Efficiency in European Banking: New Evidence," Economic and Financial Reports 1999/1, European Investment Bank, Economics Department.
  • Handle: RePEc:ris:eibefr:1999_001
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    References listed on IDEAS

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    Cited by:

    1. Jordan, Dan J. & Rice, Douglas & Sanchez, Jacques & Wort, Donald H., 2011. "Explaining bank market-to-book ratios: Evidence from 2006 to 2009," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2047-2055, August.
    2. O'Brien, Dermot & Wagenvoort, Rien, 2000. "Some Empirical Findings On The Characteristics Of Cost-Efficient Credit Institutions," Economic and Financial Reports 2000/1, European Investment Bank, Economics Department.
    3. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
    4. 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.
    5. Marko Košak & Peter Zajc & Jelena Zorić, 2009. "Bank efficiency differences in the new EU member states," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 9(2), pages 67-90, December.
    6. Fenn, Paul & Vencappa, Dev & Diacon, Stephen & Klumpes, Paul & O'Brien, Chris, 2008. "Market structure and the efficiency of European insurance companies: A stochastic frontier analysis," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 86-100, January.
    7. Danthine, Jean-Pierre & Giavazzi, Francesco & von Thadden, Ernst-Ludwig, 2000. "European Financial Markets After EMU: A First Assessment," CEPR Discussion Papers 2413, C.E.P.R. Discussion Papers.
    8. Ahmet Faruk Aysan & Ali Gunes & Osman Furkan Abbasoglu, 2007. "Concentration, Competition, Efficiency and Profitability of the Turkish Banking Sector in the Post-Crises Period," Working Papers 2007/20, Bogazici University, Department of Economics.
    9. Guenter Lang, 2000. "The Impact of SMP and EMU on German Banking," Discussion Paper Series 192, Universitaet Augsburg, Institute for Economics.
    10. Dean F. Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2003. "Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence," CEIS Research Paper 20, Tor Vergata University, CEIS.
    11. Wagenvoort, Rien & Schure, Paul, 1999. "The Recursive Thick Frontier Approach to Estimating Efficiency," Economic and Financial Reports 1999/2, European Investment Bank, Economics Department.
    12. Dean Amel & Colleen Barnes & Fabio Panetta & Carmelo Salleo, 2002. "Consolidation and efficiency in the financial sector: a review of the international evidence," Temi di discussione (Economic working papers) 464, Bank of Italy, Economic Research and International Relations Area.
    13. Koutsomanoli-Filippaki, Anastasia & Mamatzakis, Emmanuel C., 2010. "Estimating the speed of adjustment of European banking efficiency under a quadratic loss function," Economic Modelling, Elsevier, vol. 27(1), pages 1-11, January.
    14. Chrysovalantis Gaganis & Fotios Pasiouras & Charalambos Spathis, 2013. "Regulations and Audit Opinions: Evidence from EU Banking Institutions," Computational Economics, Springer;Society for Computational Economics, vol. 41(3), pages 387-405, March.
    15. Amel, Dean & Barnes, Colleen & Panetta, Fabio & Salleo, Carmelo, 2004. "Consolidation and efficiency in the financial sector: A review of the international evidence," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2493-2519, October.

    More about this item

    Keywords

    X-efficiency; Economies of scale; European Banking; Cost Frontier; Recursive Thick Frontier Approach;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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