Efficiency and Risk Convergence of Eurozone Financial Markets

Wild, Joerg (2015): Efficiency and Risk Convergence of Eurozone Financial Markets. Published in: Research in International Business and Finance , Vol. 36, (January 2016): pp. 196-211.

Abstract

This paper discusses beta and sigma convergence of commercial, savings, and cooperative banks in the Eurozone from 1999 to 2012. For this purpose, concepts of the growth and efficiency convergence literature are consulted and GMM, fixed effects models, and OLS are applied. Convergence is analyzed by calculating two efficiency metrics – data envelop- ment analysis (DEA) and stochastic frontier analysis (SFA) – and two risk metrics – equity to total assets (E/TA or EQTOAS) and Z-scores (ZSCORN). For commercial banks, efficiency convergence of both metrics is found, however, savings banks show no signs of convergence and cooperative banks only show signs of SFA convergence. Banks of all three specializa- tions show E/TA convergence, but only savings banks convergence with respect to Z-scores. Nevertheless, the EU’s Single Market Program still has a long way to go to create identical conditions for all member countries’ financial markets. The discovery that there are considerable differences between banks’ specializations, and even more, that there is convergence with respect to E/TA as a risk metric are among the main academic contributions of this paper. The final published manuscript can be obtained under: http://dx.doi.org/10.1016/j.ribaf.2015.09.015.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank efficiency, Financial risk, Convergence, DEA, SFA, Eurozone
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G0 - General > G01 - Financial Crises; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Altunbaş, Y., Gardener, E. P. M., Molyneux, P., & Moore, B. (2001). Effciency in European banking. European Economic Review, 45, 1931–1955.

Altunbas, Y., Carbo, S., Gardener, E. P., & Molyneux, P. (2007). Examining the Relationships between Capital, Risk and Efficiency in European Banking. European Financial Management, 13, 49–70. doi:10.1111/j.1468-036X.2006.00285.x.

Andrieş, A. M., & Căpraru, B. (2012a). Convergence of Bank Efficiency in Emerging Markets: The Central and Eastern European Countries’ Experience. SSRN Electronic Journal, http://dx.doi.org/10.2139/ssrn.2135506.

Andrieş, A. M., & Căpraru, B. (2012b). Impact of European Integration on Banks’ Efficiency. Procedia - Social and Behavioral Sciences, 58, 587–595. doi:10.1016/j.sbspro.2012.09.1036.

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58, 277–97. URL: http://ideas.repec.org/a/bla/restud/v58y1991i2p277-97.html.

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error- components models. Journal of Econometrics, 68, 29–51. URL: http://linkinghub.elsevier. com/retrieve/pii/030440769401642D. doi:10.1016/0304-4076(94)01642-D.

Banker, R. D., Charnes, A., & Cooper, W. W. (1984). Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis. Management Science , 30 , 1078–1092. doi:10.1287/mnsc.30.9.1078.

Barro, R. J., & Sala-i Martin, X. (1991). Convergence across States and Regions. Brookings Papers on Economic Activity, 22, 107–182. URL: http://ideas.repec.org/a/bin/bpeajo/ v22y1991i1991-1p107-182.html.

Bond, S. R., Hoeffler, A., & Temple, J. (2001). GMM Estimation of Empirical Growth Models. CEPR Discussion Papers, . URL: http://ideas.repec.org/p/cpr/ceprdp/3048.html.

Borsi, M. T., & Metiu, N. (2013). The evolution of economic convergence in the European Union. URL: http://ideas.repec.org/p/zbw/bubdps/282013.html.

Bos, J. W. B., & Schmiedel, H. (2007). Is there a single frontier in a single European banking market? Journal of Banking & Finance , 31 , 2081–2102. http://dx.doi.org/10.1016/j.jbankfin.2006.12.004.

Casu, B., & Girardone, C. (2010). Integration and efficiency convergence in EU banking markets. Omega, 38, 260–267. doi:10.1016/j.omega.2009.08.004.

Casu, B., & Molyneux, P. (2003). A comparative study of efficiency in European banking. Applied Economics, 35, 1865–1876. doi:10.1080/0003684032000158109.

Estrada, A., Galí, J., & López-Salido, D. (2013). Patterns of Convergence and Divergence in the Euro Area. URL: http://www.nber. org/papers/w19561.pdf. doi:10.3386/w19561.

Ferri, G., Liu, L.-G., & Stiglitz, J. E. (1999). The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis. Economic Notes, 28, 335–355. doi:10.1111/1468-0300.00016.

Fung, M. K. (2006). Scale economies, X-efficiency, and convergence of productivity among bank holding companies. Journal of Banking and Finance, 30, 2857–2874. doi:10.1016/j.jbankfin. 2005.11.004.

Inci, A. C., Li, H. C., & McCarthy, J. (2011). Financial contagion: A local correlation analysis. Research in International Business and Finance, 25, 11–25. doi:10.1016/j.ribaf.2010.05.002.

Luchtenberg, K. F., & Vu, Q. V. (2015). The 2008 financial crisis: Stock market contagion and its determinants. Research in International Business and Finance, 33, 178–203. URL: http://ideas.repec.org/a/eee/riibaf/v33y2015icp178-203.html.

Mac an Bhaird, C. (2013). Demand for debt and equity before and after the financial crisis. Research in International Business and Finance, 28, 105–117. URL: http://www.sciencedirect.com/ science/article/pii/S0275531912000736. doi:10.1016/j.ribaf.2012.10.001.

Maghyereh, A. I., & Awartani, B. (2012). Financial integration of GCC banking markets: A non- parametric bootstrap DEA estimation approach. Research in International Business and Finance, 26, 181–195. doi:10.1016/j.ribaf.2011.10.001.

Mamatzakis, E., Staikouras, C., & Koutsomanoli-Filippaki, A. (2008). Bank efficiency in the new European Union member states: Is there convergence? International Review of Financial Analysis, 17, 1156–1172. URL: http://ideas.repec.org/a/eee/finana/v17y2008i5p1156-1172.html.

Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107, 407–37. URL: http://ideas.repec.org/a/ tpr/qjecon/v107y1992i2p407-37.html.

Monfort, B. P. (2008). Convergence of EU regions - Measures and evolution. Murinde, V., Agung, J., & Mullineux, A. (2004). Patterns of Corporate Financing and Financial System Convergence in Europe. Review of International Economics, 12, 693–705. URL: http: //ideas.repec.org/a/bla/reviec/v12y2004i4p693-705.html.

Parikh, A., & Shibata, M. (2004). Does trade liberalization accelerate convergence in per capita incomes in developing countries? Journal of Asian Economics, 15, 33–48. URL: http://www.sciencedirect.com/science/article/pii/S1049007803001544. doi:10.1016/j. asieco.2003.12.004.

Quah, D. T. (1996). Empirics for economic growth and convergence. European Economic Review , 40 , 1353–1375. URL: http://www.sciencedirect.com/science/article/pii/0014292195000518. doi:10.1016/0014-2921(95)00051-8.

Sala-I-Martin, X. X. (1996). Regional cohesion: Evidence and theories of regional growth and convergence. European Economic Review, 40, 1325–1352. doi:10.1016/0014-2921(95)00029-1.

Sealey, C. W., & Lindley, J. T. (1977). Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions. The Journal of Finance, 32, 1251. doi:10.2307/2326527.

Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70, pp. 65–94. URL: http://www.jstor.org/stable/1884513.

Tortosa-Ausina, E. (2002). Exploring efficiency differences over time in the Spanish banking industry. European Journal of Operational Research , 139 , 643–664. http://linkinghub. elsevier.com/retrieve/pii/S0377221701001990. doi:10.1016/S0377-2217(01)00199-0.

Weill, L. (2009). Convergence in banking efficiency across European countries. Journal of International Financial Markets, Institutions and Money , 19 , 818–833. http://linkinghub. elsevier.com/retrieve/pii/S1042443109000298. doi:10.1016/j.intfin.2009.05.002.