The cost-efficiency of French banks

Jimborean, Ramona and Brack, Estelle (2010): The cost-efficiency of French banks. Published in: Bankers, Markets and Investors No. 105 : pp. 21-38.

Abstract

The paper addresses the issue of French banks efficiency, compared to their homologous from Europe and the United States. The analysis is realized on a sample formed by the ten biggest banks from France, Germany, Italy, Spain, the United Kingdom and the United States, over the period 1994-2006. The Data Envelopment Analysis (DEA) method is employed. The results show an improvement in cost-efficiency of French and Spanish banks, while in the other countries a decline in cost-efficiency is noted. We proceed to several tests of convergence, showing that inefficient banks have reduced the gap during the period 1994-2006. In a second step analysis, we focus on the factors standing behind the efficiency scores obtained through DEA methodology. These are bank-specific variables, the macro environment, the regulatory regime and the non-bank financial sector development. We use a standard censured Tobit model and show that capitalized, newly established banks, with tighter ratios of Tier 1 capital and operating in a country with a lower GDP per capita record the highest cost-efficiency scores.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cost-efficiency; Banking systems; Data envelopment analysis
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Allen L., Rai A. (1996), Optimal Efficiency in Banking: An International Comparison, Journal of Banking and Finance, 20, 655-672.

Altunbas Y., Gardener E.P.M., Molyneux P., Moore B. (2001), Efficiency in European bank- ing, European Economic Review, 45, 1931-1955.

Bank of England (2006), Financial Stability Report, Issue no. 20, July 2006.

Banker R., Charnes A., Cooper W. (1984) , Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis, Management Science, 30, 1078-1092.

Bergendhal G. (1998), DEA and benchmarks - an application to Nordic banks, Annals of Operations Research, 82, 233-249.

Berger A.N., Humphrey D.B. (1997), Efficiency of financial institutions: international survey and directions for future research, European Journal of Operational Research, 98 (2), 175-212.

Berger A.N., Mester L.J. (1997), Efficiency and Productivity Change in the U.S. Commercial Banking Industry: A Comparison of the 1980s and 1990s, Federal Reserve Bank of Philadelphia Working Paper no. 97-5.

Berger A., De Young R., Genay H., Udell G. (2000), Globalization of financial institutions: evidence from cross-border banking performance, Brookings-Wharton Papers on Financial Services: 2000, 23-125.

Brack, E. (2009), États-Unis, « soupe primitive » de la crise financière, Banque Stratégie, 269, 23-32.

Canova F., Marcet A. (1995), The Poor Stay Poor: Non Convergence across Countries and Regions, Presentation at the CEPR Workshop of Empirical Macroeconomics, Brussels.

Chaffai M.E., Dietsch M. (1999), Mesures de l'efficience technique et de l'efficience allocative par les fonctions de distance et application aux banques européennes, Revue économique, 50(3), 633-644.

Chaffai M.E., Dietsch M., Lozano-Vivas A. (2001), Technological and Environmental Differences in the European Banking Industries, Journal of Financial Services Research, 19(1/2), 147-162.

Charnes A., Cooper W., Rhodes E. (1978), Measuring the Efficiency of Decision-making-Units, European Journal of Operational Research, 6, 429-444.

Chauveau T., Couppey J. (2000), Les banques françaises de réseaux n'ont pas de problèmes majeurs d'inneficacité productive. Une application de la technique d'enveloppement des données (DEA), Revue économique, 51 (6), 1355-1380.

Coelli T., Prasada Rao D.S., Battese G.E. (1997), An Introduction to Efficiency and Productivity Analysis, Boston: Springer.

Comité des Etablissement de crédit et des entreprises d'investissement (CECEI) (2007), Les principales caractéristiques du système bancaire et financier français, Annual Report, Banque de France.

Commission Européenne (2004), Services financiers- Passer le cap- Préparer le passage à la phase suivante de l'intégration du marché des capitaux européen- Dixième rapport intermédiaire, Bruxelles, http://ec.europa.eu/internal_market/finances/docs/actionplan/index/progress10_fr.pdf,

Cook W.D, Seiford L.M. (2009), Data envelopment analysis (DEA) - Thirty years on, European Journal of Operational Research, 192, 1-17.

Cooper W.W., Seiford L.M., Tone K. (2007), Data Envelopment Analysis. A Comprehensive Text with Models, Applications, References and DES-Solver Software, Springer (second edition).

Decressin J., Faruqee H., Fonteyne W. (2007), Integrating Europe's Financial Markets, International Monetary Fund.

Dietsch M. (1996), Efficience et prise de risque dans les banques françaises, Revue économique, 47(3), 745-754.

Dietsch M., Lozano-Vivas A. (2000), How the environment determines the efficiency of banks: a comparison between French and Spanish banking industry, Journal of Banking and Finance, 24(6), 985-1004.

Dietsch M., Weill L. (1999), Les performances des banques de dépôts françaises: une évaluation par la méthode DEA, in La Méthode DEA (Eds: P. Badillo & J. Paradi), Editions Hermès.

Farrell M.J. (1957), The Measurement of Productive Efficiency, Journal of the Royal Statistical Society, 253-290.

Fiorentino E., Karmann A., Koetter M. (2006), The cost efficiency of German banks: a comparison of SFA and DEA, Discussion Paper Series 2: Banking and Financial Studies, 10, Deutsche Bundesbank.

Fixler D., Zieschang K. (1992), An index number approach to measuring bank efficiency: an application to mergers, Journal of Banking and Finance, 17, 437-450.

Fries S., Taci A. (2005), Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries, Journal of Banking & Finance, 29, 55-81.

Gabel M. (2006), Modernisation graduelle du secteur bancaire allemand, Regards sur l'économie allemande, Bulletin économique du CIRAC, 79/2006.

Gouteroux C. (2006), Le système bancaire et financier français en 2005, Bulletin de la Banque de France, 151, 75-85.

Grenet J. (2005), L'Italie sur la voie du déclin?, La vie des idées.

Grigorian D.A., Manole V. (2002), Determinants of Commercial Bank Performance in Transition. An Application of Data Envelopment Analysis, Policy Research Working Paper, 2850, World Bank.

Hancock D. (1991), A theory of Production for the Financial Firm, Kluwer Academic.

Humphrey D.B. (1991), Productivity in banking and effects from deregulation, Federal Reserve Bank of Richmond, Economic Review, March/April, 16-28.

IMF (2006), Spain: Financial System Stability Assessment, IMF Country Report, 06/212.

London Economics (2002), Quantification of the Macro-Economic Impact of Integration of EU Financial Markets, Executive Summary of the Final Report to the European Commission Directorate-General for Internal Markets, in association with Pricewaterhouse Coopers and Oxford Economic Forecasting, November 2002.

Lozano-Vivas A., Pastor J.T., Hasan I. (2001), European Bank Performance beyond Country Borders: What really matters?, European Finance Review, 5 (1-2), 141-165.

Mester L.J. (1997), Measuring efficiency at U.S. banks: accounting for heterogeneity is important, European Journal of Operational Research, 98, 230-242.

Mc Allister P.H., McManus D. (1993), Resolving the scale efficiency puzzle in banking, Journal of Banking and Finance, 17(2-3), 389-405.

Mörttinen L. (2002), Banking sector output and labour productivity in six European countries, Bank of Finland Discussion Papers, 12.

OEDC (2005), Étude économique de l'Italie, 2005.

Pastor J.M., Pérez F., Quesada J. (1997), Efficiency analysis in banking firms: An international comparison, European Journal of Operational Research, 98, 395-407.

Sealey C.W., Lindley J.T. (1977), Inputs, outputs and a theory of production and cost at depository financial institutions, Journal of Finance, 32 (4), 1251-1266.

Sherman H.D., Gold F. (1985), Bank branch operating efficiency, Journal of Banking and Finance, 9, 297-315.

Vander Vennet R. (2002), Cost and profit efficiency of financial conglomerates and universal banks in Europe, Journal of Money, Credit and Banking, 34(1), 254-282.

Weill L. (2004), Measuring Cost Efficiency in European Banking: A comparison of frontier techniques, Journal of Productivity Analysis, 21, 133-152.

Weill L. (2006a), Propriété étrangère et efficience technique des banques dans les pays en transition. Une analyse par la méthode DEA, Revue économique, 57 (5), 1093-1108.

Weill L. (2006b), L'efficience de coût des banques françaises au cours des années quatre-vingt-dix, Revue Banque & Marchés, 85, 6-16.

Weill L. (2008), Convergence in banking efficiency across European countries, Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) 2008-07, Louis Pasteur University, Strasbourg (France).

Wheelock D.C., Wilson P.W. (1997), Technical progress, inefficiency and productivity change in U.S. banking, 1984-1993, Journal of Money, Credit and Banking, 31(2), 212-234.