Recent cross-country comparisons of bank efficiency have been based on pooled estimates of banks across countries and have typically assumed a common frontier and that differences in performance among banks are primarily due to disparities in certain country-specific aspects of banking technology. This paper argues that such comparisons of performance must take into account cross-country differences in economic conditions, demographics, and regulatory structures (environmental factors). Using a sample of banks from ten leading European countries, this paper provides detailed evaluations of the efficiency of banks in each country that operate both within and outside their own environments. The results indicate that adverse (advantageous) environmental conditions are a positive (negative) factor for the home banking industry and that technical efficiency is a significant deterrence to foreign competition.
Introduction: In recent years, banking sectors in most European countries have been subjected to deregulatory initiatives and policy changes under the auspices of European Union (EU). With banking integration as a goal, the European Commission implemented two banking directives, which aim to liberalize the capital movements among member countries. It is widely agreed that such initiatives will significantly affect the degree of actual and potential cross-border competition in the integrated banking sector.Expecting a new cross border integrated environment, banking authorities at the national level, initiated different liberalization processes – a gradual lifting of interest rate restrictions, credit controls and (in some cases) entry of new banks – aiming to improve bank performance, and thus better prepare for new customers and competitive markets.
Author: Iftekhar Hasan,Ana Lozano-Vivas, Jesús T. Pastor
Source: Research Discussion Papers, Bank of Finland
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