The impact of non-traditional activities on banks’ efficiency in a low interest rates environment

Ignacio Jiménez Hernández, Yolanda Durán-Durán and Cristina del Campo

Journal of Economic Studies, 2025, vol. 53, issue 4, 687-702

Abstract: PurposeThis paper assesses the potential growth of non-traditional production in commercial banks in the Eurozone during the 2015–2019 period characterized by excessively low interest rates. In this environment, it is common for commercial banks to seek opportunities to diversify their sources of income and explore alternatives to traditional banking production, like the expansion of off-balance sheet items.Design/methodology/approachUsing Data Envelopment Analysis, this study evaluates the production plans of 63 European commercial banks under European banking supervision. Our working data refer to the years 2015–2019. High levels of inefficiency in any of the banking outputs indicate potential for growth through efficiency reduction by banks.FindingsOur results indicate that non-traditional banking activities experience substantial growth from 2017 onward, accompanied by a significant reduction in inefficiency, signalling that banks have adapted to the low interest rate environment. Our main findings identify variations in efficiency management across different countries, with some banks struggling in managing non-traditional outputs. These findings highlight the importance of effective management in non-traditional activities although the transition to a higher interest rate environment may have shifted the focus back to traditional banking products.Originality/valueLiterature that includes off-balance sheet assets as outputs in the geographical framework of the European Union is still scarce. This work aims to increase and research within this field. Also this research provides insights for bank managers to optimize both traditional and non-traditional activities, improve efficiency and better navigate shifting market conditions.

Keywords: Off-balance sheet items; European banking; Efficiency; Data envelopment analysis; Directional distance functions (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-02-2025-0073

DOI: 10.1108/JES-02-2025-0073

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