Comparing Efficiency in European Banking: A Meta Frontier Approach
De Nederlandsche Bank Research Paper No. 57
32 Pages Posted: 7 Dec 2003
Date Written: May 2003
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: Suggested Citation