Productive efficiency, technological change and productivity in Portuguese banking

In this paper we aim at studying efficiency, productivity and technological change in Portuguese banking during 1990-95, using information on the vast majority of banks operating in Portugal during that period. We use a translog variable cost function and a stochastic frontier model to estimate inefficiency and technological change. Our results suggest that the increased competition that Portuguese banks witnessed over the last few years did not lead to a better overall performance from the standpoint of costs: on the one hand, the annual efficiency average did not clearly increase over time; on the other hand, many more banks are now less efficient (in relative terms) than they were in the early 1990s. They also suggest that there is not a clear relationship between size and cost efficiency. Efficiency and scale economies also seem not to be related with size: some of the less efficient institutions (net assets below 50 million contos) are the ones facing global, although small, economies of scale and the largest institutions are the more efficient but face diseconomies of scale, therefore suggesting that they remain competitive via a better cost control. As for technological progress, our results suggest the existence of technological recess, along the six years of the sample.