How Output Diversification Affects Bank Efficiency and Risk: An Intra-EU Comparison Study

In: Balling, M., Gnan, E., Lierman, F. and Schoder, J.P. (Eds.), Productivity in the Financial Services Sector. Banque Centrale du Luxembourg/SUERF Studies 4. Editions Larcier, Brussels 2009, Chapter 12, pp. 229-257.

29 Pages Posted: 29 Mar 2009 Last revised: 2 Apr 2013

Date Written: March 28, 2009

Abstract

This paper examines how banks have been diversifying away from traditional financial intermediation activity into noninterest income business and how this shift has affected their efficiency and risk-taking behaviour. To this end, we construct a global best-practice efficiency frontier following the Stochastic Frontier Approach and relying on the technique of Battese and Coelli (1995), which permits the estimation of the frontier and of the coefficients of efficiency variables in a single-stage. We opt for an application of this model to the EU-27 countries performing an intra-Union comparison between the old and the new EU members that provides us with substantial information concerning the level of harmonization of the European banking systems. Results indicate that the diversification of bank output enlarges efficiency margins in both cost and profit terms without altering the way banks treat risk. Also, environment identically affects the performance of European banks. By and large, both old and new EU member states follow similar behavioural patterns that are not influenced by product diversification, which reveals a rather harmonized European banking market.

Keywords: output diversification, bank efficiency, risk-taking, EU banking

JEL Classification: D02, G21, G32

Suggested Citation

Papanikolaou, Nikolaos I., How Output Diversification Affects Bank Efficiency and Risk: An Intra-EU Comparison Study (March 28, 2009). In: Balling, M., Gnan, E., Lierman, F. and Schoder, J.P. (Eds.), Productivity in the Financial Services Sector. Banque Centrale du Luxembourg/SUERF Studies 4. Editions Larcier, Brussels 2009, Chapter 12, pp. 229-257. , Available at SSRN: https://ssrn.com/abstract=1369673

Nikolaos I. Papanikolaou (Contact Author)

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