Banking Efficiency in the Enlarged European Union: Financial Crisis and Convergence

Abstract

The aim of this study is to analyse whether the great shock occasioned by the financial crisis and the reaction from national governments have compromised the process of financial integration in the EU. This question is important because banking union is a cornerstone of the European integration process. We estimated the evolution of cost and profit efficiency in the enlarged EU during the period from 2000 to 2013 using Bayesian frontier stochastic models (SFA), and analysed the convergence among countries using the beta and sigma convergence tests. Our results show that the outbreak of the financial crisis interrupted the convergence and gave rise to a new divergence process. These results suggest that major reforms in European banking should be adopted by EU regulators in order to strengthen financial integration.