The Cost-Efficiency and Productivity Growth of Euro Area Banks

31 Pages Posted: 1 Aug 2019

See all articles by Ivan Huljak

Ivan Huljak

Croatian National Bank

Reiner Martin

Joint Vienna Insitute; European Central Bank (ECB)

Diego Moccero

European Central Bank (ECB)

Date Written: August, 2019

Abstract

We use an industrial organisation approach to quantify the size of Total Factor Productivity Growth (TFPG) for euro area banks after the crisis and decompose it into its main driving factors. In addition, we disentangle permanent and time-varying inefficiency in the banking sector. This is important because lack of distinction may lead to biased estimates of inefficiency and because the set of policies needed in both cases is different. We focus on 17 euro area countries over the period 2006 to 2017. We find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period. In addition, we observe that Total Factor Productivity growth for the median euro area bank decreased from around 2% in 2007 to around 1% in 2017, with technological progress being the largest contributor, followed by technical efficiency. Given the need to boost productivity and enhance profitability in the euro area banking sector, these findings suggests that bank’s efforts in areas such as rationalisation of branches, digitalisation of business processes and possibly mergers and acquisitions should be intensified.

Keywords: banking sector, bank productivity, cost-efficiency frontier, euro area, financial stability, panel data, permanent inefficiency, time-varying inefficiency, total factor productivity

JEL Classification: C23, D24, G21

Suggested Citation

Huljak, Ivan and Martin, Reiner and Moccero, Diego, The Cost-Efficiency and Productivity Growth of Euro Area Banks (August, 2019). ECB Working Paper No. 2305, Available at SSRN: https://ssrn.com/abstract=3430356

Ivan Huljak (Contact Author)

Croatian National Bank ( email )

Croatia

Reiner Martin

Joint Vienna Insitute ( email )

Mariahilferstrasse 97
Wien, A-1090
Austria

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diego Moccero

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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