Efficiency Convergence in All EU Member and Candidate Countries' Banking Markets

Abstract

This paper examines whether there has been convergence of cost and profit efficiency levels among all European Union (EU) member and candidate countries following the process of legislative harmonization, using dynamic panel data models. The test results indicate evidence of β-convergence and σ-convergence in both cost and profit efficiency among all EU member and candidate countries. Hence, the results provide evidence in favor of the process of banking markets integration in the European Union. The results also indicate that the mean cost efficiency levels are higher than those of profit efficiency, verifying the importance of inefficiencies on the revenue side of banking activity in EU banking markets. The results further suggest that there have been significant efficiency gains in the newer member and candidate countries' banking sectors.