Bank Efficiency in the Enlarged European Union

This paper aims to estimate bank efficiency differences across member states of the European Union and tries to explain their causes. We show on an empirical basis that the level and spread of bank efficiency in the EU and their changes are significantly determined by characteristics of operational environment and the “conscious” behaviour of management.In the long term, through the integration of financial markets and institutions, as well as the establishment of the Single European Banking Market, the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated; therefore only managerial ability is of any relevance. Our findings suggest that there is a costefficiency gap and convergence between the old and new member states, irrespective of the specifications of the model. With respect to profit efficiency, however, differences in efficiency between the two regions are only established after controlling for some major characteristics of the varying operational environments. Our study also investigates the relevance of and the correlation between accounting-based and statistics-based efficiency indicators. We conclude that the accounting based efficiency indicators are inadequate for managing heterogeneity arising from institutional and operational environments. Hence such indicators only allow limited cross-sectional comparison through time.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.

Analysis of banking system efficiency in the European Union

In addition to aspects related to financial stability, the cost efficiency gap observed between the banking systems of the old and the new EU member states is also unfavourable from a welfare point of view. In the majority of new member states, banks are likely to price the relatively high rate of cost efficiency losses and the oligopolistic factor linked to insufficient competition in the interest rates. The high loan and low deposit interest rates may prevent, through the volume effect, an upturn in savings and investment propensity, and thereby the implementation of a higher path of economic growth. In the course of our research, we measured variations in efficiency in the member states of the European Union and attempted to explain the reasons for such differences. We evidenced on an empirical basis that the degree of differences between member states and their change through time is significantly determined by the characteristics of the operational environment and the conscious behaviour of management. The conscious behaviour of management is of exclusive relevance in the long term, for the impact of advantages and disadvantages underlying the operational environment is reduced or eliminated through the integration of financial markets and institutions and the establishment of the Single European Market.parametric approach, X- and alternative profit-efficiency, Fourier-flexible functional form, banking system.