34 - Efficiency and cost difference across countries in a unified European banking market

Wetenschappelijke publicatie
Publicatiedatum 1 januari 2001

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.