Cost Efficiency and Technological Gap in Western European Banks: A Stochastic Metafrontier Analysis

Abstract

This paper compares the cost efficiencies of banks in Western European countries using a new stochastic metafrontier Fourier flexible cost function for the period 1996–2010. One salient feature of our method is that the TGR can be linked with country-specific environmental variables. Results show that the average TGRs in these countries are close to one another, implying that banks operating in this integrated market undertake analogous technology. Moreover, the TGR and MCE exhibit a gradual upward trend during 1996–2000, followed by a downward trend especially after the subprime crisis of 2007–2010. The managerial inability constitutes the primary source of inefficiencies.