Efficiency in the European banking industry: an exploratory analysis to rank countries

The introduction of the Euro in EMU is enhancing international competition between European banks, forcing banks to become more efficient. Which countries will be effected the most? The stochastic cost frontier approach is used to estimate the X-efficiency of the European banks, and a multiproduct translog cost function to compare cost levels. On average, Spanish, French and Italian banks appear to be less efficient than those in Germany, the Netherlands and the UK, while banks in Luxembourg, Belgium and Switzerland are the most efficient. Large differences in average X-inefficiencies and cost-levels between countries exist, Spain being around 40% above and Luxembourg about 35% below the European average. Large-scale consolidation and rationalisation of the banking industry are expected. Furthermore, the analysis provides evidence that X-efficiency estimates from single-country studies, as often found in the literature, can be very misleading.