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Unveiling endogeneity between competition and efficiency in European banks: a robust econometric-neural network approach

Author

Listed:
  • Jéfferson Colombo

    (São Paulo School of Economics, Fundação Getulio Vargas)

  • Peter Wanke

    (COPPEAD Graduate Business School, Federal University of Rio de Janeiro)

  • Jorge Antunes

    (COPPEAD Graduate Business School, Federal University of Rio de Janeiro)

  • Abul Kalam Azad

    (Islamic University of Technology)

Abstract

Research on the European banking industry remains inconclusive concerning how its competitive structure and performance are related, especially given the heterogeneity among countries in the region. We develop a Dynamic Network Data Envelopment Analysis (DNDEA) model formed by three consecutive stages—profit sheet, balance sheet, and financial health efficiency—to assess how market structure and competition impact bank efficiency in European countries. Unlike previous research, a Robust Econometric-Neural Network Approach (RENNA) is used to unveil endogeneity among bank competition, market structure, and overall efficiency scores in European banking. Consistent with the competition-efficiency hypothesis, findings reveal that competition positively affects bank efficiency, particularly its balance sheet dimension. While macroeconomic factors are robust determinants of efficiency for non-GIIPS banks, Bank Z-score is far more relevant in the GIIPS subsample (Greece, Italy, Ireland, Portugal, and Spain). Furthermore, we find only weak evidence of feedback among the variables across subsamples. Our results have critical policy implications since they highlight the heterogeneous relationship between competition and efficiency for the banking sector.

Suggested Citation

  • Jéfferson Colombo & Peter Wanke & Jorge Antunes & Abul Kalam Azad, 2022. "Unveiling endogeneity between competition and efficiency in European banks: a robust econometric-neural network approach," SN Business & Economics, Springer, vol. 2(3), pages 1-46, March.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:3:d:10.1007_s43546-021-00200-3
    DOI: 10.1007/s43546-021-00200-3
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    More about this item

    Keywords

    European banking competition; Efficiency; Endogeneity; GIIPS and non-GIIPS; Robust approach;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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