Bank Specific, Industry Specific and Macroeconomic Determinants of Bank Efficiency in Euro Area

Abstract

This study analyses the cost and profit efficiency of the banking sector in all 17-Euro area Member States during the period from 1999 until 2012. The two-stage approach, the generalized method of moment (GMM) regression model is used to regress the efficiency level obtained from the first stage on factors that could influence the efficiency score. Therefore, the efficiency score measures that derived from the DEA estimations are used as the dependent variable and then regressed upon environmental variables. The result suggests that the cost and profit efficiency of 126 listed bank is found to be on average negatively related to population density, banking activity, loan management activity, and profitability while economic condition, financial deeping rate, and bank network extension have a positive influence on cost and profit efficiency. Overall, our results demonstrate that environmental variables contribute significantly to the difference in efficiency scores between the Member States.

Keywords

• efficiency
• euro area
• generalized method of moment (gmm)
• environmental variables
• banking characteristics