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Inefficiency Distribution of the European Banking System
D24 - Production; Capital and Total Factor Productivity; Capacity
G21 - Banks; Other Depository Institutions; Mortgages
L13 - Oligopoly and Other Imperfect Markets
The inefficiency of the European banking system has been pointed out as a major vulnerability from a financial stability point-of-view. This paper contributes to the assessment of this vulnerability by considering several important features of financial intermediation such as factor prices, economies of scope and scale. We use a stochastic frontier analysis method to characterize the production function of financial intermediation in Europe and quantify inefficiency. We find that: (i) in 2013 the median European bank operated with costs 25 to 100% above the efficient level; (ii) there is ambiguous evidence on productivity growth, although inefficiency of financial intermediation has been increasing over time, possibly driven by the least efficient banks; (iii) increasing returns to scale are limited to smaller banks, although scope savings are found to be robust across all models for the average bank and (iv) that there exists a positive association between inefficiency-cost and implicit credit spreads, which are an indicator of credit market restrictions.