How Efficient are Central European Banks?

This paper explores the issue of banking efficiency in Central Europe by applying the Fourier functional form and the stochastic cost frontier approach in calculating inefficiencies for a large sample of German, Austrian, Swiss and Luxembourg banks between 1997 and 2003. The findings suggest that the largest sized banks are generally the least efficient banks and the smallest sized banks are the most efficient. The strongest economies of scale are displayed by German banks, while the weakest economies of scale are reported by Swiss banks. The findings suggest that the smallest and medium sized banks report the strongest economies of scale and the largest banks weaker economies of scale (ranging between 1.2% and 6.5%) and therefore the notion that economies of scale increase with bank size cannot be confirmed. The impact of technical change in reducing bank costs (generally about 3.5% and 4.7% per annum) appears to be systematically increasing with bank size. The largest banks are reaping the greater benefits from technical change. Overall, the results indicate that the largest banks in our sample enjoy greater benefits from technical progress, although they do not have scale economy and efficiency advantages over smaller banks.