194 - Bank Competition Efficiency in Europe: A Frontier Approach

DNB Working Papers
Date 30 December 2008

There are numerous ways to indicate the degree of banking competition across countries. Antitrust authorities rely on the structure-conduct-performance paradigm while academics prefer price mark-ups (Lerner index) or correlations of input costs with output prices (H-statistic). These measures are not always strongly correlated when contrasted across countries or positively correlated within countries over time. Frontier efficiency analysis is used to devise an alternative indicator of competition and rank European countries by their dispersion from a \competition frontier". The frontier is determined by how well payment and other costs explain variations in loan-deposit rate spread and non-interest activity revenues. Key Words: Banking competition, frontier analysis, European banks JEL Classification Code: E41 C53