Abstract

Input and output efficiency analysis in the European banking systems

Stefania P. S. Rossi, Laura Cavallo

Istituto Universitario Navale di Napoli
University of Rome "Tor Vergata"

The European banking is experiencing an intense process of concentration in the last years. The increasing competition European banks face, push them to enlarge their market power to gain a leader position in the common market. Small banks will be forced either to restrict their activity to retail customers in their small market area, or to merge with bigger institutions. This has led the banking sector to experience an unprecedented level of consolidation through merger and acquisitions operations among large financial institutions. The consolidation is based on the possibility to reap profitability, reduce cost inefficiency, increase market power, and achieve scale and scope economies.

The issue is whether consolidation leads in fact to these performance gains, given that so far the empirical literature does not support this common belief.

In this paper we measure the input X–inefficiency and we verify the presence of economies of scale and scope in six European countries, in order to test if efficiency gains are likely to emerge from the concentration process.

Our results for the period 1992-1997 suggest that in the European banks the X-inefficiency still represents one of the major problems. On the contrary, the output efficiency analysis shows scale and scope economies for most financial institutions.

We can infer that European banking integration, built upon the liberalization of capital flows and the two banking European directives, did not favour to reduce cost inefficiencies until 1997. The results of the output analysis suggest that banks should enhance their output mix, in order to fully exploit economies of scale and scope. Our evidence supports the ongoing tendency of banks to restructure and merge.