The productivity growth of euro area banks

• Published in: Journal of productivity analysis Vol. 58; no. 1; pp. 15 - 33
• Main Authors: Huljak, Ivan, Martin, Reiner, Moccero, Diego
• Format: Journal Article
• Language: English
• Published: New York Springer US 2022; Springer Nature B.V
• Subjects: Accounting/Auditing; Banking industry; Banks; Cost control; COVID-19; Econometrics; Economic crisis; Economics; Economics and Finance; Efficiency; Equity; Eurozone; Interest rates; International finance; Loans; Longitudinal studies; Macroeconomics; Microeconomics; Monetary policy; Operations Research/Decision Theory; Productivity; Profitability; Profits; Sovereign debt; Europe; cost-efficiency frontier; panel data; C23; time-varying inefficiency; D24; G21; Euro area banking sector; persistent inefficiency; total factor productivity
• ISSN: 0895-562X; 1573-0441
• DOI: 10.1007/s11123-022-00637-0

We study the performance of the banking system in the Eurozone over the period 2006–2017 as measured by total factor productivity growth (TFPG) and its components. We find that Total Factor Productivity growth for the median euro area bank decreased from around 2.6% in 2007 to below 1.7% in 2017, driven mainly by a decline in technical efficiency. In addition, we control for unobserved heterogeneity across banks and disentangle persistent and time-varying inefficiency in the banking sector. This modelling choice is important to avoid distorted and biased inefficiency estimates. We find that cost efficiency in the euro area banking sector amounted to around 84% on average over the 2006 to 2017 period. The largest part of bank inefficiency is persistent, suggesting that structural long-term factors (such as location, client structure, macroeconomic environment, regulation, etc.) play a bigger role than time-varying factors.