New evidence on efficiency in Southern European banking

Abstract

This paper explores the issue of efficiency in Southern European banking by applying the Fourier functional form and the stochastic cost frontier approach in calculating inefficiencies for a large sample of Southern European banks between 1997 and 2003. The findings suggest that the largest sized banks are generally the least efficient, while the smallest sized banks are the most efficient. The strongest economies of scale are displayed by Spanish banks, while the weakest economies of scale are reported by Greek banks. The findings suggest that medium-sized banks report the strongest economies of scale, and the largest and smallest banks weaker economies of scale (ranging between 3,5% and 7%). Therefore, the notion that economies of scale increase with bank size cannot be confirmed. The impact of technical change in reducing bank costs (generally about 3% and 4% per annum) appears to systematically increase with bank size. The largest banks reap greater benefits from technical change. Overall, the results indicate that the largest banks in the sample enjoy greater benefits from technical progress, although they do not have scale economy and efficiency advantages over smaller banks.