Convergence in Banking Efficiency across European Countries

Abstract

Since the preparation of the Single Market program in the 80s, financial integration in Europe has been expected to provide gains in growth by favoring competition and efficiency on financial markets. Our paper aims to check whether financial integration has taken place on the banking markets, by investigating the convergence in banking efficiency for European Union countries. We measure cost efficiency of banks from 10 EU countries between 1994 and 2005 with the stochastic frontier approach. Our work then constitutes the first one to apply tests of beta and sigma convergence specified for panel data on banking efficiency measures.

We provide evidence of cross-country differences in cost efficiency and of an improvement in cost efficiency for all EU countries. Tests of convergence support the view of a process in convergence in cost efficiency between EU countries. Robustness checks with alternative specifications confirm these findings. These results support the view that financial integration has taken place on the EU banking markets in the recent years.

Keywords: banking, convergence, efficiency, European integration, stochastic frontier approach

JEL Classification: G21, D21, F36