Recent evidence on efficiency in Southern European banking

The purpose of this paper is to explore the issues of efficiency, economies of scale and technical change in Southern European banking.

The flexible Fourier functional form of the stochastic cost frontier approach is used to calculate inefficiencies for a large sample of Southern European banks between 1999 and 2004. Economies of scale estimates are calculated by estimating firm‐specific cost elasticities.

The findings suggest that the largest sized banks are generally the least efficient banks and the smallest sized banks are the most efficient. The strongest economies of scale are displayed by Spanish banks, while the weakest economies of scale are reported by Greek banks. The impact of technical change in reducing bank costs (generally about 3 and 4 per cent per annum) does not appear to differ according to bank size.

This study does not distinguish private banks from public or mutual banks and does not account for the effect of risk on the employment of bank capital.

The value of this paper is to provide new and recent evidence on the very important issue of efficiency and technical change in Southern European markets.