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Cost-Efficiency and Productivity of euro area banks

Author(s): Ivan Huljak, Reiner Martin, Diego Moccero

Date published: Feb 2020

SUERF Policy Note, Issue No 135
by Ivan Huljak, Reiner Martin and Diego Moccero

JEL-codes: C23, D24, G21.
Keywords: Bank productivity, cost-efficiency, euro area, banking sector, financial stability, total factor productivity, cost-efficiency frontier, panel data.

The efficiency of banks is highly relevant for financial stability, in particular in the current low-interest rate environment. The literature has traditionally used accounting indicators to assess banks’ cost efficiency and productivity. In this note, we present the results of an industrial organisation approach-based analysis, quantifying Total Factor Productivity (TFP) growth for euro area banks and decomposing it into its main driving factors. In addition, we disentangle permanent and time-varying inefficiency in the banking sector. We focus on 17 euro area countries over the period 2006 to 2017 and find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period relative to the efficiency frontier. In addition, we observe that TFP growth for the median euro area bank decreased from around 2% in 2007 to around 1% in 2017 and that the differences between countries tend to be relatively small. These findings suggest that banks should intensify their efforts in areas such as rationalisation of branches, digitalisation of business processes and possibly mergers and acquisitions. In addition, banks should look beyond traditional cost cutting measures to reverse the trend decline in banking sector productivity.
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SUERF Policy Note, Issue No 135SUERF Policy Note, Issue No 135

Cost-Efficiency and Productivity of euro area banksWeb version: Cost-Efficiency and Productivity of euro area banks

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