Measurement of cost efficiency in the European banking industry

Abstract

The main goal of the paper is to measure and to analyse the efficiency results of banking industry by using mathematical linear programming method, DEA. Cost efficiency is tested for the period 2008-2012 on the sample of EU-28. The results suggest that banking systems of post-transition countries have higher cost efficiency. Those systems still have dominant deposit lon-term financing base, but also have specific competition, risk exposure, financial and macroeconomic environment, which have significant influence on financial services prices and as a consequence potentially higher banking sector earnings. DEA efficiency results are compared with chosen accounting cost efficiency ratios as well, to see if there exists correlation between the results of different cost efficiency measurement methodologies. The main difference was remarked in sense of accounting approach efficiency measurement scores lag. This comparison can help in bringing to more precise conclusion about banking industry efficiency.