Efficiency in Banking: Empirical Evidence from the Savings Banks Sector

Abstract

This study aims to contribute to the established literature by using the Fourier flexible functional form and stochastic cost frontier methodologies to estimate scale economies and X‐inefficiencies for a large sample of European savings banks between 1989 and 1996. In their extensive review of the bank efficiency literature, Berger and Humphrey note that the volume of European studies has not matched that of the USA and there exists a paucity of cross‐country studies. Whereas scale economies are widespread and positively related to bank size, we find no evidence of a significant relationship between size and X‐efficiency. Generally, scale economies are found to range between 7 and 10 per cent, while X‐inefficiency measures appear to be much larger, around 22 per cent. These results suggest that European savings banks can obtain cost reductions through reducing managerial and other inefficiencies and also by increasing the scale of production.

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