Multidirectional conditional convergence in European banking

The paper examines the behavioural patterns arising from the analysis of productivity and convergence in European banking, using a sample of commercial banks regulated by the Single Supervisory Mechanism, during 2011 to 2017. Productivity change and its decompositions is measured for each input and output dimension separately, using a variant of the multidirectional productivity analysis framework. We introduce a novel approach for testing for β-convergence in productivity, efficiency and technology, as well as in each dimension considered. We find strong evidence of absolute convergence during the period of study, suggesting that bank operations move towards a common frontier rather than local equilibria. Prior to the creation of the Single Supervisory Mechanism in 2013, conditional convergence is confirmed in many instances with respect to liquidity and capital adequacy, although few cases remain significant in the subsequent period. We conclude that regulatory controls have facilitated integration, though there are important implications arising that policymakers need to consider when designing policies.