Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?

38 Pages Posted: 12 Sep 2007

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Abstract

This paper employs stochastic frontier cost and profit models to estimate economies of scale as well as X-efficiency for multi-billion dollar European and U.S. banks in the period 1995-1999. Empirical results with respect to separate analyses of large European and U.S. banks are strikingly similar with decreasing (increasing) cost (profit) returns to scale. We find that large banks in Europe and the U.S. have cost and profit functions that are similar with increasing returns to scale and decreasing (increasing) scope economies for the cost (profit) model. Further analyses evaluate the reasonableness of estimating a combined cost or profit frontier for European and U.S. banks. We find that, while a single profit frontier may exist, separate cost frontiers are implied. Although profitability in absolute terms is equal, large U.S. banks tend to exhibit higher average profit efficiency than European banks on average. Moreover, banks in the U.S. are more profit efficient than banks in most individual European countries. We conclude that the empirical results tend to support the notion that potential efficiency gains are possible via geographic expansion of large European and U.S. banks.

Keywords: X-efficiency, scale, scope, distance, banking

JEL Classification: G21, L11, L22, L23

Suggested Citation

Kolari, James W., Large Bank Efficiency in Europe and the United States: Are There Economic Motivations for Geographic Expansion in Financial Services?. Journal of Business, Vol. 78, No. 4, pp. 1555-1592, July 2005. Available at SSRN: https://ssrn.com/abstract=498842

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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