Banking Efficiency in the Enlarged European Union: Financial Crisis and Convergence

• Published date: 01 April 2016
• Author: Manuel Salvador,José L. Gallizo,Jordi Moreno
• Date: 01 April 2016
• DOI: http://doi.org/10.1111/infi.12083

Banking Efficiency in the

Enlarged European Union:

Financial Crisis and

Convergence

Jos

e L. Gallizo

y

, Jordi Moreno

y

and Manuel Salvador

z

y

University of Lleida, and

z

University of Zaragoza.

Abstract

The aim of this study is to analyse whether the great shock occasioned

by the financial crisis and the reaction from national governments have

compromised the process of financial integration in the EU. This

question is important because banking union is a cornerstone of the

European integration process. We estimated the evolution of cost and

profitefficiency in the enlarged EU during the period from 2000 to 2013

using Bayesian frontier stochastic models (SFA), and analysed the

convergence among countries using the beta and sigma convergence

tests. Our results show that the outbreak of the financial crisis inter-

rupted the convergence and gave rise to a new divergence process. These

results suggest that major reforms in European banking should be

adopted by EU regulators in order to strengthen financial integration.

This paper has benefited from the financial suppor t provided by the Spa nish Ministry of Economy

and Competitiveness, Rese arch Project ECO2012-350 29 (‘T

ecnicas Estad



ısticas no Param

etricas y

Bayesianas para el An

alisis de Modelos Din

amicos en Mercados Financieros’). The authors would also

like to express their thank s to Professor Cecilio Mar, the editor and anony mous referees for their

helpful and construct ive observations on earl ier versions of this paper.

International Finance 19:1, 2016: pp. 66–88

DOI: 10.1111/infi.12083

© 2016 John Wiley & Sons Ltd

I. Introduction

This paper is concerned wit h the process of convergence in banking ser vices in the

European Union (EU), in particular convergence as it relates to efficienc y in cost and

profit. It is generally assumed that an i ntegrated market results in a bette r allocation

of resources, resulting in highe r productivity, efficiency an d effectiveness (Kondeas

et al. 2008; Casu and Girardone 2009). To achieve these gains, EU regulators have

taken initiatives to create a unified capital market.

1

It is expected that the different

EU countries, by adapting their operating frameworks, will converge towards

financial integrati on.

The world economic and financial crisis that started in the year 2008 was a shock

to the process of financial integ ration (Dabrowski 2010; Fonteyne et al. 2010). To

support their financial sectors, the governments of individual countries took ac tions

that were sometimes drastic and not coordinated at the Europea n level. Did these

actions compromise the process of financial integration in the EU? This is an

important question g iven that banking union is a cor nerstone of the European

integration process.

Traditionally, the degree of banking integration has been assessed us ing perfor-

mance indicators, in particular price-based indicators and quantity indicators.

Price-based indic ators attempt to esta blish whether financial ser vices are priced

equally across different countrie s. A downside of using them is that, given that

banking is a heav ily regulated indus try, prices may reflect different regulatory

environments as well as cultural d ifferences that exist acros s countries. Quantity

indicators are based on the volume of cross -border financial flows and on the

amount of assets held by foreign comp anies in a particular country. They are not a

perfect signal either, since the absence of such cross-border flows may still be

compatible with a hig h degree of financial integr ation.

2

Performance indicators are limited in the se nse that they are one-dimensional

measures, which may be unsuit able for capturing the full comp lexity of the banking

industry. It is better to use tools that capture the industry ’smanydimensions,

which is the approach we take in this stu dy. Such multi-dimensional tools exis t, and

have been used exte nsively in the stu dy of efficiency (Berger and Humphrey 1992).

In this study we fo cus on modelli ng efficiency from perspe ctives of cost efficiency

and profitefficiency.

We estimate the banking efficiency in 29 European countries during the period

2000–2013. Our sample includes data corresponding to the EU-27 countries and

1

These initiatives have taken the form of Europea n Directives (88/361/CE E, 2006/123/CE, 200 4/38/

CE), banking Direct ives (2013/36/EU, 2014/49/E U, 2014/59/EU) and measures to ensu re the free

movement of capital and la bor.

2

Tomova (2005) argues that this is th e case when compet itive pressures keep differences i n prices

equal to arbitrage costs.

Banking Efficiency in the Enlarged European Union 67

© 2016 John Wiley & Sons Ltd