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Title:Economies of scale and efficiency in European banking: new evidence PDF Logo
Authors:Schure, Paul
Wagenvoort, Rien
Issue Date:1999
Series/Report no.:Economic and financial reports / European Investment Bank 1999/01
Abstract:This paper investigates the cost efficiency of 1974 credit institutions across 15 European countries over the five-year period following the implementation of the Second Banking Directive in 1993. The Recursive Thick Frontier Approach is employed to estimate a Augmented Cobb-Douglas cost frontier that allows banks of different types, in different periods, and belonging to different size categories, to operate at different costs per unit of assets. As size economies are exhausted at a balance sheet total of EUR 600 million, we do not find major economic gains from economies of scale for the overall European banking industry. However, the saving bank sector may reduce average costs with roughly 6% by choosing an optimal size for its institutions. No impact of technological progress on the average costs of the full sample of X-efficient banks could be detected but managerial efficient saving banks reduced average costs with 9% during our sample period. The most important reason for inefficiencies in the European banking is managerial inability to control costs. Although in some countries such as the UK and The Netherlands cost reductions were rapidly achieved, the average level of X-inefficiency of European banks still exceeded 16% in 1997.
Subjects:X-efficiency
Economies of scale
European Banking
Cost Frontier
Recursive Thick Frontier Approach
JEL:G21
Document Type:Working Paper
Appears in Collections:Economic and Financial Reports, European Investment Bank (EIB)

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