Measuring the Efficiency of the Banking System in a Dualistic Economy: Evidence from the Italian Case

The paper provides an analysis of some features of the Italian banking system during the decade 1993–2003. In particular, it focuses on the efficiency of Italian banks – in terms of parametric cost and profit functions – taking into account the dualistic structure which characterizes the Italian economy, the bank size and the juridical form. During this period the Italian banking system has experienced a higher level of competition and significant ownership changes; these phenomena had a relevant impact on the performance of all banks. In particular, we found a reduction of differences in the efficiency between Northern and Southern banks. In addition, small banks exhibit a higher level of efficiency compared with the large ones. Finally, we observe that Mutual Banks improved in a significant way their performance compared with the banks organized as limited companies and cooperative. These results confirm the ability of local small Mutual Banks to effectively and successfully compete in the markets characterized by global operators. The reason for the continuing vitality of local banks is due to the fact that they offer a different product from large global banks and attract customers, specially small local firms, which external global banks would find difficult to serve.