The Efficiency and the Conduct of European Banks: Developments after 1992

Abstract

The paper addressses the efficiency of the European banking sector in the five-year period following the implementation of the Second Banking Directive of the European Union (EU). We first determine the degree of cost efficient European banks in the period 1993-1997. After that we explore to what extent efficient European banks are managed differently than their inefficient peers. Our datasetss comprise 5 years of observations on 1347 savings banks and 873 commercial banks, and we use the new Recursive Thick Frontier Approach method to establish our results. We find that structural factors such as technological progress or increased bank competition have lowwered the cost base of banks by about 5 percent annually in the sample period. Managerial efficiency variew a great deal withuin Europe, and there seems to be no tendency towoards convergence. We detect economies to scale for small savings banks. The savings bank sector as a whole can cut costs by about 3 percent through mergers of small savings banks.