A three-phase comparative efficiency analysis of US and EU banks

Yiannis Anagnostopoulos, Kjetil Husa, Emmanouil Noikokyris

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Abstract

We examine the efficiency of European Union (EU) and U.S banks over the 2000-2018 period, where we divide our sample into three distinct time periods; pre-crisis (2000–2006), during (2007–2010) and post-crisis (2011–2018). We test for differences in technical efficiency based on size using the DEA method, where each region is sub-divided into four tiers of banking groups based on lending size. In addition to the DEA method, the effect of the financial crisis on banking efficiency is established through the Difference-in-Differences (DID) estimation, along with a Tobit estimation in an attempt to further examine the factors behind changes in efficiency. The findings from the research indicate that European banks are lagging behind the U.S in terms of technical efficiency, both before and after the crisis. Although the European banks are seemingly behind in terms of technical and scale efficiency, interestingly the European sector has actually grown by 16% from the period prior to the crisis, with the U.S posting a more modest 6% increase in efficiency. Our results are robust and further backed by the DID estimation, as we find a trend for increasing efficiency over time, however the results also show that the financial crisis had a negative impact on banking efficiency for the period with the overall difference of banking efficiency between the two trading blocs is the intensity of their transvariation. We find that the largest group of banks (S.I.Bs) can achieve higher technical efficiency by increasing their credit risk, while in contrast the smaller banks are rewarded by reducing their risk exposure further exacerbating thus the large divide among large and small banks. From a risk regulation perspective, the divergent behaviour, and the lack of common financial standards between EU and US banks, as evidenced by the divergent requirements imposed to the credit institutions, could affect both the competitiveness and the stability of the financial system. The implications of our results are of interest to the wider investing community, banking practitioners and regulators.
Original languageEnglish
Pages (from-to)113-127
Number of pages15
JournalInternational Review of Economics and Finance
Volume81
Early online date13 May 2022
DOIs
Publication statusPublished - Sept 2022

Keywords

  • bank efficiency, US banks, EU banks, banking performance, risk regulation

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