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Inefficiency Distribution of the European Banking System

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  • João Oliveira

Abstract

The inefficiency of the European banking system has been pointed out as a major vulnerability from a financial stability point-of-view. This paper contributes to the assessment of this vulnerability by considering several important features of financial intermediation such as factor prices, economies of scope and scale. We use a stochastic frontier analysis method to characterize the production function of financial intermediation in Europe and quantify inefficiency. We find that: (i) in 2013 the median European bank operated with costs 25 to 100% above the efficient level; (ii) there is ambiguous evidence on productivity growth, although inefficiency of financial intermediation has been increasing over time, possibly driven by the least efficient banks; (iii) increasing returns to scale are limited to smaller banks, although scope savings are found to be robust across all models for the average bank and (iv) that there exists a positive association between inefficiency-cost and implicit credit spreads, which are an indicator of credit market restrictions.

Suggested Citation

  • João Oliveira, 2017. "Inefficiency Distribution of the European Banking System," Working Papers w201712, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w201712
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp201712.pdf
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    References listed on IDEAS

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    1. Hughes, Joseph P. & Mester, Loretta J. & Moon, Choon-Geol, 2001. "Are scale economies in banking elusive or illusive?: Evidence obtained by incorporating capital structure and risk-taking into models of bank production," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2169-2208, December.
    2. Miguel Boucinha & Nuno Ribeiro & Thomas Weyman-Jones, 2013. "An assessment of Portuguese banks’ efficiency and productivity towards euro area participation," Journal of Productivity Analysis, Springer, vol. 39(2), pages 177-190, April.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    4. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
    5. Greene, William, 2005. "Reconsidering heterogeneity in panel data estimators of the stochastic frontier model," Journal of Econometrics, Elsevier, vol. 126(2), pages 269-303, June.
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    Cited by:

    1. Ferreira, Cândida, 2021. "Efficiency of European Banks in the Aftermath of the Financial Crisis: A Panel Stochastic Frontier Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 36(1), pages 103-124.
    2. Cândida Ferreira, 2020. "Evaluating European Bank Efficiency Using Data Envelopment Analysis: Evidence in the Aftermath of the Recent Financial Crisis," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(4), pages 391-405, November.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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