Efficiency and technical change for Spanish banks

Abstract

Frontier cost efficiency and technical change are examined for separate panels of Spanish commercial and savings banks over 1985–91, a period in which interest rates were totally deregulated and geographical restrictions were removed. Deregulation was supposed to provide an opportunity for the Spanish banking industry to become more efficient prior to the removal of competitive barriers between countries within the EEC. Two previous studies have estimated production frontiers for the operating cost component of Spanish savings banks using a non-parametric (DEA) approach, finding a decrease in relative efficiency plus the equivalent of higher frontier costs. Operating cost accounts for only 40% of total cost. By including all costs, financial as well as operating, we determine the total cost efficiency of Spanish commercial and savings banks and their total response to deregulation. Cost efficiency is determined using a thick frontier approach while shifts in the cost frontier are determined using a time trend analysis. Our results suggest that deregulation was associated with a decrease in relative cost efficiency for commercial banks but no change for savings banks. The cost frontier shifted up for both types of institutions over 1985–91. Overall, our efficiency results paint a more positive picture regarding the effects of deregulation on the Spanish banking industry than obtained previously, although we still find similar negative effects for technical change.

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