Does Competition Lead to Efficiency? The Case of EU Commercial Banks

In Europe, the past twenty years saw a process of liberalisation, deregulation and unprecedented financial sector reform whose main aims were to increase competition and remove all remaining barriers to the integration of EU banking sectors. However, the recent acceleration in the consolidation process has raised concerns about the potential implications for public policies deriving from increased market power. Using bank level balance sheet data for commercial banks in the major EU banking markets, this paper aims to shed some light on the recent developments in competition, concentration and bank-specific efficiency levels. Furthermore, using a Granger-type causality test estimations, this study aims to investigate the relationship between competition and efficiency in banking markets. Our findings suggest a negative causation between efficiency and competition, whereas the causality running from competition to efficiency, although positive, is relatively weak.