Evaluating European Bank Efficiency Using Data Envelopment Analysis: Evidence in the Aftermath of the Recent Financial Crisis

Abstract

This paper seeks to contribute to the analysis of bank efficiency in the European Union during the aftermath of the international financial crisis that began in 2007, using data envelopment analysis and a sample of 485 banks from all European Union member-states between 2011 and 2017. The results confirm the existence of bank inefficiency, mostly due to inefficient managerial performance and bad combinations of bank inputs and outputs. The existence of bank inefficiency is particularly relevant during this period as European Union countries faced not only financial imbalances but also imbalances in their public budgets. Some were even obliged to request international financial assistance to overcome the deep financial and sovereign crises. Additionally, there was evidence of appropriate scale production and dynamic technological changes during the interval. Moreover, the panel estimates explaining bank total factor productivity changes suggest the choices of banks in terms of fixed assets, profit-before-taxes-to-average-assets ratio and off-balance-sheet-items-to-total-assets ratio contributed positively to productivity changes. The impaired-loans-to-equity ratio and bank interest margins were not in line with the total factor productivity changes of the European Union banking sector.