Comparing Efficiency in European Banking: A Meta Frontier Approach

De Nederlandsche Bank Research Paper No. 57

32 Pages Posted: 7 Dec 2003

See all articles by Jaap W.B. Bos

Jaap W.B. Bos

Maastricht University

Heiko Schmiedel

European Central Bank - Securities Settlement Systems Policy Division

Date Written: May 2003

Abstract

A persistent paradox in stochastic frontier efficiency research is that we cannot compare the X-efficiency of firms without assuming these firms to operate under a common frontier. In this paper, we address this imbalance by constructing so-called meta-frontiers. Specifically, we build on recent advances by Battese et al. (2002) in enveloping regional frontiers. First, we estimate country-specific and common cost and profit frontiers. Second, we apply a type of envelope that provides a good fit for a meta-frontier. Using a data set of more than 5000 large commercial banks from all major European banking markets over the period 1993-2000, the application of meta-frontiers enables us to assess the existence of a single European banking market. Empirical evidence supports the view that traditional efficiency techniques based on pooled frontier efficiency scores tend to underestimate cost and profit efficiency levels resulting in biased cross-country comparisons.

Keywords: X-efficiency, stochastic frontiers, banking, meta-frontiers

JEL Classification: G21, L11, L22, L23

Suggested Citation

Bos, Jaap W.B. and Schmiedel, Heiko, Comparing Efficiency in European Banking: A Meta Frontier Approach (May 2003). De Nederlandsche Bank Research Paper No. 57. Available at SSRN: https://ssrn.com/abstract=460060 or http://dx.doi.org/10.2139/ssrn.460060

Jaap W.B. Bos

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Heiko Schmiedel (Contact Author)

European Central Bank - Securities Settlement Systems Policy Division ( email )

Directorate General Payment Systems
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49-69 13 44 70 59 (Phone)
+49-69 13 44 60 00 (Fax)

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