José Manuel Pastor

Cost and profit efficiency in European banks

Abstract In recent years, over a hundred studies have analysed the efficiency of financial institutions, mostly centring on costs. However, the few available studies that estimate profit frontier functions report efficiency levels that are much lower than cost efficiency levels, implying that the most important inefficiencies are on the revenue side. There are also few studies that run comparisons at an international level, and none of these deals with profit efficiency. This paper analyses, by means of alternative techniques, both cost and profit efficiency in a sample of ten countries of the European Union for the period 1993–1996, again obtaining profit efficiency levels lower than cost efficiency levels. The paper also examines several possible sources of the differences in measured efficiency, including differences in size, specialisation, other bank characteristics, and market characteristics.

An Efficiency Comparison of European Banking Systems Operating under Different Environmental Conditions

The paper investigates the operating efficiency differences of a sample of commercial banks across 10 European countries. First, the paper analyzes the technical efficiency of each country sample following the “basic” Data Envelopment Analysis (DEA) model incorporating only banking variables. Then, a “complete” DEA model is introduced, incorporating environmental factors together with the banking variables of the basic model. The comparison between the two models shows that country-specific environmental conditions exercise a strong influence over the behavior of each countrys banking industry.

Cost and profit efficiency in the Spanish banking sector (1985–1996): a non-parametric approach

The aim of this article is to analyse the efficiency in costs and in profits of the Spanish banking sector (SBS) in the period 1985–1996 using a non-parametric approach. The results obtained show the existence of profit efficiency levels well below those corresponding to cost efficiency, alternative profit efficiency being below standard profit efficiency. These results imply the existence of market power in the setting of prices and/or the existence of differences in the quality of bank output reflected in the differences in prices. With regard to the immediate future, of full economic and monetary integration, the reduction of profit levels associated with higher competitive pressure may be offset by the reduction of all kinds of inefficiency, which is a very important potential source of competitiveness. Indeed, the results referring to 1996 indicate that the return on assets (ROA) and on equity (ROE) of the SBS could increase by 2.4% and 24.4% respectively, eliminating the combined inefficiency in costs and revenues.

Productivity, efficiency and technical change in the European railways: A non-parametric approach

The purpose of this paper is to analyse the evolution of productivity in the European railways in the period 1970–95. We use a non-parametric approach that enables changes in productivity to be broken down into variations in efficiency and technical change. The results indicate that the productivity growth is concentrated in the last period (1985–95), when the majority of the companies undertook processes of reforms. This increase in productivity is mainly due to technical progress. We also analyse the determinants of efficiency and, unlike other papers, the technical change, finding that the greater the degree of autonomy and financial independence, the higher the efficiency levels and technical change.

Credit risk and efficiency in the European banking system: A three-stage analysis

Increased competition and the attempts of European banks to increase their presence in other markets may have affected the efficiency and credit risk in the banking system. The first aspect is the incentive in reducing costs in order to gain in competitiveness. The second is associated with their lack of knowledge of such markets and/ or acceptance of a higher risk in order to increase their market share. Despite the importance of these aspects, banking literature has usually analysed the effects of competition on the efficiency of banking systems without considering these aspects. The few studies that attempt to obtain risk adjusted efficiency measures do not consider that part of the risk is due to exogeneous circumstances. This article proposes a new three-stage sequential technique, based on the DEA model and on the decomposition of risk into its internal and external components, for obtaining efficiency measures adjusted for risk and environment. It is seen that the technique allows the use of any existing technique of incorporation of environmental variables in DEA analysis.

Total factor productivity measurement and human capital in OECD countries

Abstract This paper analyses the Total Factor Productivity (TFP) evolution in OECD countries by breaking down productivity gains into technical change and efficiency change. To avoid biases, Malmquist indices of productivity, including human capital, are estimated. The results indicate that, in fact, the inclusion of human capital has a significant effect on the accurate measurement of TFP.

Efficiency and risk management in Spanish banking: a method to decompose risk

The single market programme has substantially increased the level of competition in the Spanish Banking System (SBS). This greater competition, though driving firms to improve their efficiency, may also encourage them to orient their businesses towards activities, sectors, and/or clients of higher risk. However, in spite of the importance of jointly evaluating efficiency and risk, the traditional measurements of efficiency do not take risk into account. Furthermore, the few studies that attempt to include risk do not separate the part of risk that is due to poor management (internal) from that which originates in the economic environment (external). This article proposes a new sequential DEA procedure to break down the main indicator of banking risk provision for loan losses (PLL)— into internal and external components, in order subsequently to obtain measurements of efficiency adjusted for risk. The analysis is illustrated by application to the SBS where deregulation, imposed by the Single Market Programme of the European Community, has affected banks conduct in terms of efficiency and risk.

Competition and efficiency in the Spanish banking sector: the importance of specialization

This paper analyses the importance of productive specialization in explaining cost efficiency differences between banking companies. Taking as reference the Spanish banking sector during the period 1985–1996, the study shows that if cost efficiency measurements are corrected for the effect of different specialization by the estimation of separate frontiers for four different groups of competitors, the efficiency of companies improves. The behaviour of costs would thus be compatible with that of other competition indicators, reflecting the effects of a more competitive situation in the Spanish banking sector at present than at the start of the period considered.

- Convergence In Oecd Countries: Technical Change, Efficiency And Productivity

The aim of this study is to analyse labour productivity convergence in the OECD countries over the period 1975-90. A nonparametric frontier approach is used to calculate the Malmquist productivity index. By breaking it down, the contribution in the growth of labour productivity of technical progress, of changes in efficiency, and of the accumulation of inputs per worker are quantified. Unlike other studies, the results obtained show that technical change has worked against labour productivity convergence, since it has always been greater in the countries with higher labour productivity.

EFFICIENCY, ENDOGENOUS AND EXOGENOUS CREDIT RISK IN THE BANKING SYSTEMS OF THE EURO AREA *

The implantation of the Euro in 11 of the EU states has driven the big banks to expand their presence in other European countries, which may have negative consequences on their credit risk in view of the disadvantages involved in entering new markets. The aim of this study is to analyse the efficiency and the credit risk of the banks of the most important countries of the Euro area, using a one-stage parametric stochastic procedure that allows one to identify whether the behaviour towards risk of the banks analysed was more cautious or more reckless during the period analysed. The results indicate that adjustments for risk are important in the case of profit efficiency but not in the case of cost efficiency.