An Empirical Study of Bank Efficiencies and Technology Gaps in European Banking

Abstract

This paper extends the established literature on modeling the cost structures of Europe`s banking sectors by combining the Fourier flexible cost function with time‐varying technical efficiency (TE) under the framework of the meta-frontier, as proposed by Battese et al. (Journal of Productivity Analysis, Vol. 21 (2004), pp. 91-103) and O`Donnell et al. (Empirical Economics, Vol. 34 (2008), pp. 231-255). We find multiple technologies prevail in the nine sample countries, justifying the use of the meta-cost frontier. Measures TE and technology gap ratios are found to be positively correlated with each other, implying that a relatively technically efficient bank is possibly technologically efficient and vice versa.