Efficiency and profitability of European banks: how important is operational efficiency?

Karl Werner and Jürgen Moormann

No 111, Frankfurt School - Working Paper Series from Frankfurt School of Finance and Management

Abstract: Most previous research on efficiency in banking takes a regulatory perspective. In contrast, this paper investigates the empirical relation between efficiency and profitability in five large economies of the European Union during the period 1998-2005 and discusses the results from the perspective of corporate bank strategy. Methodologically the existing literature is expanded by the use of DEA super-efficiency values to regress profitability, the incorporation of risk by calculative costs of capital, and a model specification built on the modern understanding of banks as centers of value creation. The results of the conducted static and dynamic regression analyses show that profitable banks operate with higher technical efficiency than their competitors. Furthermore, the strategic environment and in this regard the structure and concentration of the national financial sector have a considerable impact on a bank's financial performance. Both issues proved to be statistically and economically significant. Thus, the results support the appropriateness of the generic strategy of cost leadership for the European banking market. Banks following this strategic position were able to achieve higher excess returns during the analyzed period.

Keywords: Banks; corporate strategy; efficiency; operational efficiency; profitability (search for similar items in EconPapers)
JEL-codes: C14 G21 L25 M21 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ban, nep-cse, nep-eec and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fsfmwp:111

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