The Impact of Non-bank Lending on Bank Efficiency: Data Envelopment Analysis of European Banks

Abstract

This paper applies a data envelopment analysis (DEA) to study the effect of non-bank financial intermediation on bank efficiency in the eight EU jurisdictions individually monitored under the Financial Stability Board (FSB) Global Shadow Banking Monitoring Report in the period 2014-2016.The efficiency analysis is conducted by applying a profit-based input-oriented DEA variable returns-to-scale model in a two-stage procedure. In the first stage, the average DEA efficiency scores are calculated. We find evidence that the average aggregate technical efficiency increased on average from 2014 to 2016. In the second stage, the impact of environmental factors like the Financial Stability Board’s (FSB) narrow measure on non-bank financial intermediation as well as macroeconomic factors is analyzed by conducting a Tobit regression. The results provide evidence of a negative relationship between non-bank financial intermediation and average bank efficiency and a positive impact of GDP on average bank efficiency. These novel empirical findings contribute to the policy discussions on the effect of non-bank financial intermediation on bank performance and thus on financial stability. Moreover, our analysis provides unique initial evidence in favor of the hypothesis that increased non-bank financial intermediation might result into a reduction of bank profitability.