A Comparative Study of Efficiency in European Banking

The structure of European banking markets has substantially changed over the past decade, partially as a result of the creation of the Single Internal Market. The process of integration and accompanying deregulation has embodied an incentive for bank management to focus on improving efficiency, especially given the more competitive banking environment. In this paper, employing the non-parametric DEA approach, we investigate whether the productive efficiency of European banking systems has improved and converged towards a common European frontier between 1993 and 1997, following the process of EU legislative harmonisation. We also examine the determinants of European bank efficiency using a Tobit regression model approach. We then extend the established literature on the determinants bank efficiency by taking into account the problem of the inherent dependency of DEA efficiency scores when used in regression analysis. To overcome the dependency problem a bootstrapping technique is applied. Overall, the results suggest that since the EU’s Single Market Programme there has been a small improvement in bank efficiency levels, although there is little evidence to suggest that these have converged. Efficiency differences across European banking markets appear to be mainly determined by country-specific factors.