The purpose of this paper is to investigate the cost efficiency of banks
operating in two "non-core" EU countries, Portugal and Spain, over a number of
years. Specifically, the paper aims to examine the extent to which banks'
efficiency is influenced by their portfolio orientation and scale of operation.
Data envelopment analysis is used to identify banks' levels of performance over
time in both countries. In order to decompose banks' total factor productivity
change into technological, scale efficiency and pure efficiency changes, the
Malmquist index method is applied. Banks operating in both countries have
improved their performance over time and savings banks and large banks, in
particular, have tended to outperform other types of banks. Banks operating in
Spain tend to perform better than in Portugal and Spanish-owned banks perform
better than their Portuguese-owned counterparts. The improvements in performance
revealed have mainly been due to technological change. Bankscope is a well-
respected data source and has been the basis of many studies of performance in
international banking. Unfortunately, owing to data deficiencies, around 20 per
cent of the banks operating in Portugal and Spain were not included. Practical
implications - If Portuguese banks are to be competitive internationally, there
is considerable need for efficiency improvements. The paper provides insights
into the dynamics of the Portuguese and Spanish banking systems. The results
should be of interest to management in banking and bank regulators in Europe,
and economists and others studying bank performance trends. The research
reported may shed light on some of the challenges facing the banking sectors of
the "new" EU states (such as Poland and Hungary)
