Bank Efficiency, Productivity and Convergence in EU countries: A Weighted Russell Directional Distance Model

Fujii, Hidemichi and Managi, Shunsuke and Matousek, Roman and Rughoo, Aarti (2017): Bank Efficiency, Productivity and Convergence in EU countries: A Weighted Russell Directional Distance Model.

Abstract

The objective of this study is three-fold. First we estimate and analyse bank efficiency and productivity changes in the EU28 countries with the application of a novel approach, a weighted Russell directional distance model. Second, we take a disaggregated approach and analyse the contribution of the individual bank inputs on bank efficiency and productivity growth. Third, we test for convergence in EU28 bank productivity as well as in the inefficiency of individual bank inputs. We find that bank efficiency has been undermined by the financial crisis in banks notably from the EU15 countries. We also argue that bank efficiency and productivity in EU countries vary across the banking sector with banks from the ‘old’ EU showing higher efficiency levels. Nonetheless, a noticeable catching up process is observed for banks from the ‘new’ EU countries. Consequently, we do not find evidence of group convergence for bank productivity but there is evidence of convergence in bank efficiency change and technical change among the EU28 countries throughout the period 2005-2014. The driving force seems to be convergent technical change from the old EU Member States’ banks. On the other hand, almost no convergence is detected for the banks’ individual inputs while the transition paths show heightened diversity during the crisis years.

• Item Type: MPRA Paper
• Language: English
• Keywords: European Union; Bank Efficiency; Convergence
• Subjects: F - International Economics > F6 - Economic Impacts of Globalization > F65 - Finance; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

References

Altunbaş, Y., Gardener, E.P.M., Molyneux, P., Moore, B., 2001. Efficiency in European banking. European Economic Review 45, 1931-1955.

Assaf, A.G., Matousek, R., Tsionas, E.G., 2013. Turkish bank efficiency: Bayesian estimation with undesirable outputs. Journal of Banking and Finance 37, 506-517.

Balk B, Färe R, Grosskopf S., Margaritis D. 2008. Exact relations between Luenberger productivity indicators and Malmquist productivity indexes. Economic Theory, 35: 187-190.

Barros, P., Berglof E.,, Fulghieri P., Gual J., Mayer C., Vives X., 2005. Integration of European banking: the way forward. Monitoring European Deregulation. CEPR.

Barros, C.P., Managi, S., Matousek, R., 2012. The technical efficiency of the Japanese banks: Non-radial directional performance measurement with undesirable output. Omega, 40, 1-8.

Barros, C.P.; Ferreira, C. and Williams, J., 2007. Analysing the Determinants of Performance of the Best and Worst European banks: A Mixed Logit Approach. Journal of Banking and Finance, 31, 2189-2203.

Berg, S.A., Forsund, F.R., Jansen, E.S., 1992. Malmquist indices of productivity growth during the deregulation of Norwegian banking, 1980–89. Scandinavian Journal of Economics 94, 211–228.

Berger, A.N., 2003. The efficiency effects of a single market for financial services in Europe. European Journal of Operational Research, 150, 466-481.

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

Bloomberg 2009. Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aI.TvvSBYXBM [Accessed 26 November 2014]

Brissimis, S.N., Delis, M.D., Tsionas, E.G., 2010. Technical and allocative efficiency in European banking, European Journal of Operational Research 204, 153-163.

Cabral, I., Dierick, F.,Vesala, J.M., 2002. Banking Integration in the Euro Area. ECB Working Paper No. 6.

Casu, B., Girardone, C., 2006. Bank Competition, Concentration and Efficiency In The Single European Market. Manchester School, 74, 441-468.

Casu, B., Girardone, C., 2010. Integration and efficiency in EU banking markets. Omega 38, 260-267.

Casu, B., Molyneux, P., 2003. A comparative study of efficiency in European banking. Applied Economics 35, 1865-1876.

Charnes, A., Cooper, CC., Rhodes, E., 1978. Measuring the efficiency of decision making units. European Journal of Operational Research 2(6): 429-444.

Chen, P.C., Yu, M.M., Chang, C.C., Hsu, S.H., Managi, S., 2015. Non-radial directional performance measurement with undesirable outputs: An application to OECD and non-OECD countries. International Journal of Information Technology & Decision Making 14 (3), 481-520.

Chortareas G. E., Girardone C., Ventouri A. 2012. Bank supervision, regulation and efficiency: Evidence from the European Union. Journal of Financial Stability 8, 292-302.

Chortareas G. E., Girardone C., Ventouri A. 2013. Financial freedom and bank efficiency : Evidence from the European Union. Journal of Banking and Finance 37, 1223-1231.

Coelli, T., Rahman, S., Thirtle, C., 2002. Technical, allocative, cost and scale efficiencies in Bangladesh rice cultivation: A non-parametric approach. Journal of Agricultural Economics 53, 607-626.

European Commission 2014. Economic review of the financial regulation agenda. Working document.

ECB 2012. Financial Integration in Europe.

Färe, R., Grosskopf, S., Lovell, C.A.K., Pasurka, C.A. 1989, Multilateral productivity comparisons when some outputs are undesirable: a nonparametric approach, The Review of Economics and Statistics 71, 90-98.

Färe, R., Grosskopf, S. Norris, M., Zhang, Z. 1994, Productivity growth, technical progress and efficiency change in industrialized countries, American Economic Review 84, 66–83.

Farrell, M.J. 1957. The Measurement of Productive Efficiency. Journal of the Royal Statistical Society, Series A (General), 120, 253-290.

Fiordelisi, F. Marques-Ibanez, D., Molyneux, P, 2011. Efficiency and risk in European banking. Journal of Banking and Finance 35, 1315–1326.

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

Fujii, H., Managi, S., Matousek, R., 2014. Indian bank efficiency and productivity changes with undesirable outputs: A disaggregated approach. Journal of Banking and Finance 38, 41-50.

Fujii, H., Cao, J., Managi, S. 2015. Decomposition of productivity considering multi-environmental pollutants in Chinese industrial sector. Review of Development Economics 19, 75-84.

Fukuyama, H., Weber, W.L., 2008. Japanese banking inefficiency and shadow pricing. Mathematical and Computer Modelling 71, 1854–1867

Goddard, J., Molyneux, P., Wilson, J.O.S., Tavakoli, M., 2007. European Banking: An Overview. Journal of Banking and Finance 31, 1911–35.

Kasman A., Kasman S., Ayhan D., Torun E., 2013. Total factor productivity and convergence: evidence from old and new EU member countries’ banking sectors. Journal of Business Economics and Management 14, 13-35.

Kasman A., Tunc G., Vardar G., Okan B., 2010. Consolidation and commercial bank net interest margins: Evidence from the old and new European Union members and candidate countries Economic Modelling 27, 648–655.

Matousek R., Rughoo A., Sarantis N., Assaf A., 2014. Bank performance and convergence during the financial crisis: Evidence from the ‘old’ European Union and Eurozone. Journal of Banking and Finance 52, 208-216.

OECD 2012. Bank deleveraging, the move from bank to market-based financing, and SME financing. Financial market trends OECD Journal 1.

Park, K., Weber, W., 2006. A note on efficiency and productivity growth in the Korean banking industry, 1992–2002. Journal of Banking and Finance 30, 2371– 2386.

Phillips, P.C.B., Sul, D., 2007. Transition modelling and econometric convergence tests. Econometrica 75, 1771–1855.

Phillips, P.C.B., Sul, D., 2009. Economic transition and growth. Journal of Applied Econometrics 24, 1153–1185.

Rughoo A., Sarantis N., 2012. Integration in European retail banking: Evidence from savings and lending rates to non-financial corporations. Journal of International Financial Markets, Institutions and Money 22, 1307-1327.

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

Shen, Z., Liao, H., Weyman-Jones, T., 2009. Cost efficiency analysis in banking industries of ten Asian countries and regions. Journal of Chinese Economic and Business Studies 7, 199-218

Shephard, R.W. and Färe R., 1974. The law of diminishing returns. Journal of Economics 34, 69-90.

Tsionas, E.G., Assaf, GA., Matousek, R. 2015. Dynamic technical and allocative efficiencies in European banking. Journal of Banking and Finance 52, 130-139.

Weill, L., 2009. Convergence in banking efficiency across European countries. Journal of International Financial Markets, Institutions and Money 19, 81-88.