European Economic Review 45 (2001) 1931}1955

E$ciency in European banking

Y. Altunbas7 , E.P.M. Gardener
, P. Molyneux
*, B. Moore
The Business School, South Bank University, London, UK

University of Wales, Bangor, UK
Erasmus University, Rotterdam, UK
Downing College, University of Cambridge, Cambridge, UK
Received 1 September 1997; accepted 1 April 2000

Abstract
This paper extends the established literature on modelling the cost characteristics of
banking markets by applying the #exible Fourier functional form and stochastic cost
frontier methodologies to estimate scale economies, X-ine$ciencies and technical change
for a large sample of European banks between 1989 and 1997. The results reveal that
scale economies are widespread for smallest banks and those in the ECU 1 billion to
ECU 5 billion assets size range. Typically, scale economies are found to range between
5% and 7%, while X-ine$ciency measures appear to be much larger, between 20% and
25%. X-ine$ciencies also appear to vary to a greater extent across di!erent markets,
bank sizes and over time. This suggests that banks of all sizes can obtain greater cost
savings through reducing managerial and other ine$ciencies. This paper also shows that
technical progress has had a similar in#uence across European banking markets between
1989 and 1997, reducing total costs by around 3% per annum. The impact of technical
progress in reducing bank costs is also shown to systematically increase with bank size.
Overall, these results indicate that Europe's largest banks bene"t most from technical
progress although they do not appear to have scale economy advantages over their
smaller counterparts.  2001 Elsevier Science B.V. All rights reserved.
JEL classixcation: G21; D21; G23
Keywords: Banking; E$ciency; Frontiers

* Correspondence address: School of Accounting, Banking and Economics, University of Wales,

Bangor Gwynedd, Bangor, LL57 2DG, U.K. Tel.: (01248) 382170; fax: (01248) 364760.
E-mail address: p.molyneux@bangor.ac.uk (P. Molyneux).
0014-2921/01/$ - see front matter  2001 Elsevier Science B.V. All rights reserved.
PII: S 0 0 1 4 - 2 9 2 1 ( 0 0 ) 0 0 0 9 1 - X

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Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1. Introduction
The Commission of the European Communities (1988) has stressed in its 1992
single market programme that substantial bene"ts would accrue to those sectors
that can bene"t from positive supply-side e!ects. In particular, &price reductions
occasioned by competitive pressures will force "rms to look actively for reduction in costs through the elimination of areas of low productivity or by a greater
exploitation of scale economies' (European Economy, 1988, p. 162). Despite the
importance of cost e$ciencies, however, only a few studies have investigated
cost characteristics in European banking and no studies, as far as we are aware,
have provided comparable cross-country comparisons of scale and X-e$ciencies. This paper aims to redress this imbalance by using the #exible Fourier
functional form and stochastic cost frontier approach to evaluate evidence of
scale and X-ine$ciencies, as well as technical change, across 15 European
banking markets between 1989 and 1997.
This paper extends the established literature on modelling the cost characteristics of banking markets by applying the #exible Fourier functional form and
stochastic cost frontier methodologies to estimate scale economies, X-ine$ciencies and technical change for a large sample of European banks between 1989
and 1997. The results reveal that scale economies are widespread for smallest
banks and those in the ECU 1 billion to ECU 5 billion assets size range.
Typically, scale economies are found to range between 5% and 7%, while
X-ine$ciency measures appear to be much larger, between 20% and 25%.
X-ine$ciencies also appear to vary to a greater extent across di!erent markets,
bank sizes and over time. This suggests that banks of all sizes can obtain greater
cost savings through reducing managerial and other ine$ciencies. This paper
also shows that technical progress has had a similar in#uence across European
banking markets between 1989 and 1997, reducing total costs by around 3% per
annum. The impact of technical progress in reducing bank costs is also shown to
systematically increase with bank size. Overall, these results indicate that
Europe's largest banks bene"t most from technical progress although they do
not appear to have scale economy advantages over their smaller counterparts.

2. E7ciency in banking markets } A brief literature review

Over recent years the structure of European banking has been changing
rapidly and a main motivation has been the drive for greater e$ciency. A
substantial US literature has emerged (for example, see Berger et al., 1993;
Kaparakis et al., 1994; Mester, 1996; Mitchell and Onvural, 1996) which "nds
that X-e$ciencies, brought about by superior management, technologies and
other factors, exceed those e$ciencies resulting from scale and scope economies.
In their review of the US literature, Berger et al. (1993) "nd that X-ine$ciencies

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1933

account for around 20% or more of costs in banking, while scale and productmix ine$ciencies, &when accurately estimated', are usually found to account for
less than 5% of costs.
Although European research on cost e$ciency has not matched the volume of
US studies this has begun to change in recent years. The majority of European
studies have focused on the issue of scale and scope economies in individual
countries and for particular types of banks. The earliest researchers used
Cobb}Douglas and CES cost function methodologies to model underlying cost
functions, whereas from the mid-1980s onwards, most studies have used the
translog functional form to estimate the cost characteristics of the banking
industry. Levy-Garboua and Renard (1977), Dietsch (1988, 1993) and Martin
and Sassenou (1992) have examined cost economies in French banking and
found mixed results, although the studies suggest stronger evidence of scale
e$ciencies, especially for the smallest banks. Studies of the Italian market
undertaken by Cossutta et al. (1988), Baldini and Landi (1990) and Congliani
et al. (1991) also "nd strong evidence of scale e$ciencies. Lang and Welzel (1996)
also used the standard translog cost function methodology to estimate cost
economies for German cooperative banks and they "nd evidence of scope
economies for the largest banks. Cost studies in the UK have focused on the
building society sector mainly because of the limited number of domestic
commercial banks with similar business pro"les. These include studies by
Gough (1979), Cooper (1980), Barnes and Dodds (1983), Hardwick (1989, 1990),
Drake (1992, 1995) and McKillop and Glass (1994). The UK studies use a range
of competing methodologies and report con#icting results. Evidence of scale
economies has also been found in Finland for the cooperative and savings bank
sector (Kolari and Zardkoohi, 1990), Ireland (Glass and McKillop, 1992), Spain
(Fanjul and Maravall, 1985; Rodriguez et al., 1993) and Turkey (Fields et al.,
1993). Finally, Vennet (1993) uses the translog approach to investigate a sample
of 2600 credit institutions operating in the EU for the year 1991. He "nds that
optimal scale is situated in the $3}10 billion asset range and there also appears
to be scope economies for the largest banks. (See Molyneux et al. (1996, Chapter
6) for a comprehensive review of this literature.)
The above literature focuses on scale and scope economies, whereas more
recent literature has attempted to evaluate X-ine$ciencies and technical change
in various European banking markets. Berg et al. (1991, 1992), Berg et al. (1993)
and Berg et al. (1995) have made an important contribution to the literature in
their studies of Scandinavian banking markets. The earlier studies focus on the
Norwegian market and the later work analyses e$ciency di!erences across
Scandinavian banking markets. For example, Berg et al. (1993) uses Data
Envelopment Analysis (DEA) to measure the X-ine$ciency of banks in three
Nordic countries (Finland, Norway and Sweden). An innovative technique
(a form of Malmquist productivity index) was used to model the banking
frontier technologies. Overall they found that Swedish banks tended to be more

1934

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

e$cient than their Nordic counterparts. The most recent study, by Berg et al.
(1995) uses DEA to investigates ine$ciencies in the banking industries of
Denmark, Finland, Norway and Sweden. The study "nds that the largest
Danish and Swedish banks were among the most e$cient units in their pooled
sample and only one large Finnish bank and one large Norwegian bank were
more than 90% e$cient. They concluded that the Danish and Swedish banks
were in the best position to expand in a common Nordic banking market.
Various studies of the Spanish banking market have used DEA techniques to
investigate productivity, evaluating improvement in cost e$ciency by measuring total factor productivity and technical change. Perez and Quesada (1994),
for example, provide estimates of changes in productivity for the main savings
and commercial banks between 1986 and 1992 and show that the productivity
gains of the largest banks have been substantial. They also show that a group of
commercial banks representing up to 40% of the sector operate with e$ciencies
20% or lower than the most e$cient banks (see also Pastor et al., 1994). More
recent studies undertaken by Gri!ell-Tatje and Lovell (1995a,b, 1996) use similar linear programming techniques and their own &generalised Malmquist
productivity index' to investigate productive e$ciency and total factor productivity in Spanish savings banks between 1986 and 1991. They conclude that
neither branching nor mergers provide an adequate explanation for the nature
of the productivity decline over the period studied. Other studies using DEA
techniques to model bank productivity and e$ciencies include Drake and
Howcroft (1994) for UK building societies and Gobbi (1995) on Italian banks.
While the aforementioned European studies use non-parametric techniques,
such as DEA, to estimate e$ciencies in banking markets, there appears to be
limited evidence of the use of stochastic cost frontier techniques to model these
relationships. This is surprising given that much of the recent US literature (for
example, see Berger et al., 1993; Kaparakis et al., 1994; Mester, 1996) use
parametric techniques and Resti (1997), in his study of the Italian banking
market, shows that both linear programming and stochastic cost frontier approaches tend to provide similar cost e$ciency results. (A "nding also con"rmed
by Drake and Weyman-Jones (1992)). This paper aims to add to the established
literature by modelling e$ciencies using the stochastic cost frontier and #exible
Fourier (FF) functional form to approximate the underlying cost characteristics
of the EU banking industry.

3. Methodology
While there continues to be debate about the de"nition of outputs used in cost
e$ciency studies we follow along the lines of the traditional intermediation
approach as suggested by Sealey and Lindley (1977), where the inputs, labour,
physical capital and deposits are used to produce earning assets. Two of our

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1935

outputs, total loans and total securities are earning assets and we also include
total o!-balance sheet items (measured in nominal terms) as a third output.
Although the latter are technically not earning assets, this type of business
constitutes an increasing source of income for banks and therefore should be
included when modeling banks' cost characteristics, otherwise, total output
would tend to be understated (Jagtiani and Khanthavit, 1996). Various recent
studies (such as those by Hughes and Mester (1993), Hughes et al. (1995), Mester
(1996) and Clark (1996)) have drawn attention to the fact that bank e$ciency
studies typically ignore the impact of risks on banks' costs, and they suggest that
risk characteristics need to be incorporated in the underlying industry cost
function because, &unless quality and risk are controlled for, one might easily
miscalculate a bank's level of ine$ciency' (Mester, 1996, p. 1026). As suggested
in Hughes and Mester (1993) and Mester (1996) we include the level of equity
capital in our cost frontier to control for di!erences in banks risk preferences.
Ine$ciency measures are estimated using the stochastic cost frontier approach. This approach labels a bank as ine$cient if its costs are higher than
those predicted for an e$cient bank producing the same input/output combination and the di!erence cannot be explained by statistical noise. The cost frontier
is obtained by estimating a cost function with a composite error term, the sum of
a two-sided error representing random #uctuations in cost and a one-sided
positive error term representing ine$ciency.
Frerier and Lowell (1990) have shown that ine$ciency measures for
individual "rms can be estimated using the stochastic frontier approach as
introduced by Aigner et al. (1977), Meeusen and van den Broeck (1977). The
single-equation stochastic cost function model can be given as
C"C(Q , P )#

(1)
G G
G
where TC is observed total cost, Q is a vector of outputs, and P is an input-price
G
G
vector. Following Aigner et al. (1977), we assume that the error of the cost
function is

"u#v

(2)

where u and v are independently distributed; u is assumed to be distributed as

half-normal, u&N(0, ), i.e., a positive disturbance capturing the e!ects of
S
ine$ciency, and v is assumed to be distributed as two-sided normal with zero
mean and variance, , capturing the e!ects of the statistical noise.
T
Observation-speci"c estimates of the ine$ciencies, u, can be estimated by
using the conditional mean of the ine$ciency term, given the composed error
term, as proposed by Jondrow et al. (1982). The mean of this conditional

 Thanks to a referee for pointing out the implications of incorporating risk variables in the cost
function speci"cation.

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Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

distribution for the half-normal model is shown as


E(u 
)"
G G
1#



f (
/)


G
# G
1!F(
/)

G

(3)

where " / and total variance, "#; F( . ) and f ( . ) are the stanS T
S
T
dard normal distribution and density functions, respectively. E(u 
) is an unbiased but inconsistent estimator of u , since regardless of N, the variance of the
G
estimator remains non-zero (see Greene, 1993, pp. 80}82). Jondrow et al. (1982)
have shown that the ratio of the variability for u and v can be used to measure
a banks' relative ine$ciency, where " / , is a measure of the amount of
S T
variation stemming from ine$ciency relative to noise for the sample. The
X-ine$ciency term, u, is assumed to remain constant over time for each bank.
Estimates of this model can be computed by maximising the likelihood function
directly (Olson et al., 1980). Previous studies modelling international bank
ine$ciencies such as, Allen and Rai (1996) and those which examine US banks,
such as Kaparakis et al. (1994) and Mester (1996), all use the half-normal
speci"cation to test for ine$ciency di!erences between banking institutions.
The next step, given the choice of the half-normal ine$ciency stochastic
frontier approach, relates to choosing the underlying cost function speci"cation.
In this paper, we use the #exible Fourier (FF) form to examine the speci"cation
which best "ts the underlying cost structure of EU banking systems. Gallant
(1981, 1982), Berger et al. (1994) and Mitchell and Onvural (1996) have stated
that the FF is the global approximation which can be shown to dominate the
conventional translog form. It has been widely accepted that the global property
is important in banking where scale, product mix and other ine$ciencies are
often heterogeneous. Therefore, local approximations (such as those generated
by the translog function) may be relatively poor approximation to the underlying true cost function.
The FF is a semi-nonparametric approach used to tackle the problem arising
when the true functional form of the relationships are unknown. This methodology was "rst proposed by Gallant (1981, 1982), was discussed by Elbadawi et al.
(1983), Chalfant and Gallant (1985), Eastwood and Gallant (1991), Gallant and
Souza (1991) and was applied to the analysis of bank cost e$ciency by Berger

 See Bauer (1990) for an excellent review of the frontier literature and how di!erent stochastic
assumptions can be made. Cebenoyan et al. (1993), for example, uses the truncated normal model.
Mester (1993) in common with many studies uses the half-normal distribution. Stevenson (1980) and
Greene (1990) have used the normal and gamma model, respectively. Altunbas7 and Molyneux (1994)
"nd that e$ciency estimates are relatively insensitive to di!erent distributional assumptions when
testing the half normal, truncated normal, exponential and gamma e$ciency distributions, as all
distributions yield similar ine$ciency levels for the German banking market.

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1937

et al. (1994), Spong et al. (1995) and more recently by Mitchell and Onvural
(1996) used this methodology. It has been shown (Tolstov, 1962), that a linear
combination of the sine and cosine function, namely the Fourier series, can "t
exactly any well behaved multivariate function. This is due to the mathematical
behaviour of the sine and cosine functions which are mutually orthogonal over
the [0, 2] interval and function space-spanning. The FF form, therefore, provides a better approximation of the true form of the unknown cost function
without misspeci"cation.
To calculate the ine$ciency measures, the FF form, including a standard
translog and all "rst-, second- and third-order trigonometric terms, as well as
a two-component error structure is estimated using a maximum likelihood
procedure. Note also that a variable for "nancial capital is included to control
for risk. This is shown as


ln C" #
 ln Q #
 ln P # # ln E

G
G
J
J


G
J
1  
 
#

ln Q ln Q #


ln P ln P
GH
G
H
JK
J
K
2
G H
J K
 
#
ln E ln E#  #

 ln Q ln P


GK
G
K
G K



#
 ln P ln E#
 ln Q ln E#
ln Q
G
G
G
H
G
G
G
G
G


#
 ln P #
[a cos(z )#b sin(z )]
J
J
G
G
G
G
J
G
 
#

[a cos(z #z )#b sin(z #z )]#

GH
G
H
GH
G
H
G H
where

(4)

ln C"natural logarithm of total costs (operating and "nancial cost),

ln Q "natural logarithm of bank outputs,
G
ln P "natural logarithm of ith input prices (i.e. wage rate, interest rate
J
and physical capital price),
ln E"the natural logarithm of equity capital,
"time trend,

 Note that the "nancial capital variable (E) is fully interactive with the output (Q) and input price
variables.

1938

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Z "the adjusted values of the log output ln Q and ln E such that

G
G
they span the interval [0, 2],
, , , ,
, ,
, , , , , , a and b are coe$cients to be estimated.
Following Berger et al. (1994), the study applies Fourier terms only for the
outputs, leaving the input price e!ects to be de"ned entirely by the translog
terms. The primary aim is to maintain the limited number of Fourier terms for
describing the scale and ine$ciency measures associated with di!erences in
bank size. Moreover, the usual input price homogeneity restrictions can be
imposed on logarithmic price terms, whereas they cannot be easily imposed on
the trigonometric terms.
In addition, the scaled log-output quantities, z , are calculated as
G
z " (ln Q #w ), ln Q are unscaled log-output quantities;  and w are scaled
G
G
G
G
G
G
G
factors, writing the periodic sine and cosine trigonometric functions within one
period of length 2 before applying the FF methodology (see Gallant, 1981). The
 's are chosen to make the largest observations for each scaled log-output
G
variable close to 2; w 's are restricted to assume the smallest values close to
G
zero. In this study, we restricted the z to span between 0.001 and 6 to reduce
G
approximation problems near the endpoints as discussed by Gallant (1981) and
applied by Mitchell and Onvural (1996).
Since the duality theorem requires that the cost function is linearly homogeneous in input prices and second-order parameters are symmetric, the following restrictions apply to the parameters of the cost function in Eq. (4):




 "1;

"0;
 "0;
J
JK
J
J
J
J
"
GH
HG

and
"
.
JK
KJ



 "0,
GK
K
(5)

 Mitchell and Onvural (1996, p. 181) did not impose restrictions on the trigonometric input price
coe$cients for computational reasons. Gallant (1982), however, has shown that this should not
prevent an estimated FF cost equation from closely approximating the true cost function.
 Berger et al. (1997) restricted z to span [0.1:2, 0.9; 2], however, the use of this interval
G
provided inconsistent results in the present study. Following Mitchell and Onvural (1996),
we adopted a second trigonometric order in our study. According to Gallant (1982), increasing the
number of trigonometric orders, relative to sample size, reduces approximation errors. Eastwood
and Gallant (1991) show that the FF cost function produces consistent and asymptotically
normal parameter estimates when the number of parameters estimated is set to the number of
e!ective observations raised to the two thirds power. However, Gallant (1981) advocates that even
a limited number of trigonometric orders is su$cient to obtain global approximations. The choice of
the range used by di!erent researchers is, however, subjective and relative to the size of data set
analysed.

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1939

The cost frontiers are estimated using the random e!ects panel data approach
(as in Lang and Welzel, 1996). We use the panel data approach because technical
e$ciency is better studied and modelled with panels (Baltagi and Gri$n, 1988;
Cornwell et al., 1990; Kumbhakar, 1993). The random e!ects model is preferred
over the "xed e!ects model because the latter is considered to be the more
appropriate speci"cation if we are focusing on a speci"c set of N "rms. Moreover, and if N is large, a "xed e!ects model would also lead to a substantial loss
of degrees of freedom (Baltagi, 1995).
Within sample scale economies are calculated as in Mester (1996) and are
evaluated at the mean output, input price and "nancial capital levels for the
respective size quartiles. A measure of economies of scale (SE) is given by the
following cost elasticity by di!erentiating the cost function in Eq. (4) with
respect to output. This gives us
  ln C

 
 
SE"

"
 #

ln Q #

 ln P
G
GH
H
GK
K
 ln Q
G
G
G
G H
G K


#
#
[!a sin(Z )#b cos(Z )]
G
G
G
G
G
G
G
G
 
#2

[!a sin(Z #Z )#b cos(Z #Z )].
G
GH
G
H
GH
G
H
G H

(6)

If SE(1, then we have increasing returns to scale (implying economies of scale);

if SE"1 then we have constant returns to scale; if SE'1 then we have
decreasing returns to scale (implying diseconomies of scale). Following McKillop et al. (1996) and Lang and Welzel (1996) the rate of technical progress may
be inferred from changes in a "rm's cost function over time. A time trend
variable, , serves as a proxy for disembodied technical change. The time-trend
is a &catch-all' variable that captures the e!ects of technological factors: i.e.
learning by doing and organisational changes allowing for the more e$cient use
of existing inputs, together with the e!ects of other factors, such as changing
environmental regulations (Baltagi and Gri$n, 1988; Nelson, 1984). Technical
progress allows the "rm to produce a given output, Q, at lower levels of total
cost over time, holding input prices and regulatory e!ects constant. In order to
estimate the impact of technical change we calculate the variation in the average
cost due to a given change in technology. This can be measured by the partial
derivative of the estimated cost function with respect to the time trend () and
can be shown as follows:
 ln C


" # #
 ln P #
ln Q .


J
J
G
G

J
G

(7)

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Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

4. Data and results

This study uses banks' balance sheet and income statement data for a
sample of European banks between 1989 and 1997, obtained from the Londonbased International Bank Credit Analysis Ltd.'s &Bankscope' database. Table
1 reports the de"nition, mean and standard deviation of the input and output
variables in real terms used in the cost frontier estimations (all data are in real
1990 terms and they have been converted using individual country GDP
de#ators). The descriptive statistics along with parameter estimates are shown
in the appendix.
Scale economies are estimated for all the banks and the mean of the overall
economies of scale are reported for each country and for di!erent sizes of banks
over the years 1989 to 1997 are shown in Table 2.
Table 2 presents a mixed picture. The top of the table suggests that scale
economies are prevalent across EU banking systems, with the notable exception
of the Finnish market. Typically scale economies range between 5% and 7%.
Thus a 100% increase in the level of all outputs, on average, would lead to about
a 93% to 95% increase in total costs, respectively. However, the lower part of
Table 2 reveals that the aforementioned "ndings are mainly a result of widespread scale economies found for the smallest banks (banks with assets size
between ECU 1 to ECU 200 million) and those in the ECU 1 to ECU 5 billion
assets size range. The largest banks, with the exception of those in Denmark,
Germany, Netherlands and the UK, exhibit constant or diseconomies of scale
(as do the majority of European banks in the ECU 200 million } 1 billion asset
size category). The magnitude of the scale economy estimates for the overall
banking system are in accordance with previous studies of the US banking
system, as is evidence on widespread economies for the smallest banks (see
Berger et al., 1993). The lack of evidence of scale economies for the largest banks
is to a certain extent corroborated by the "ndings of Vennet's (1993) study on
EU banking.

 Thanks to one referee for pointing out the problems associated with using nominal data in
estimating technical change.
 Various structural tests were undertaken to test for data poolability and heteroscedasticity and
these con"rmed the applicability of the panel data approach. These results are available upon
request from the authors.
 These results di!er from those obtained by estimating the same cost function without controlling
for risk (i.e. excluding the equity capital variable). While the yearly banking system estimates present
a similar picture of widespread scale economies (ranging between 5% and 10%), the results for
di!erent size categories of banks was almost the complete opposite. In all countries, apart from in
Belgium, Greece, the Netherlands, Portugal and Spain, the smallest banks exhibited constant
returns. Scale economies typically become larger with size and optimal bank size was inexhausted.
These results are available from the authors on request.

237.2

1632.8

2431.0

2665.0

0.5083

28.8

45.2

187.0

253.0

0.4741

0.0423

31.3
0.0141

Median

1009.9

12 143.3

11 972.0

12 971.0

0.2330

0.0311

1506.0
0.0086

StDev

1.4

0.5

1.0

2.0

0.0697

0.0079

0.6
0.0006

Min

19 447.5

337 864.4

243 006.0

254 630.0

2.4000

0.4133

25 804.6
0.1340

Max

Number of observed banks: 4104.

The "gures have been de#ated using country speci"c GDP de#ators with 1990 as a base year.

We de"ne the price of labour as total personnel expenses divided by total assets because the IBCA bank database does not include comprehensive
information on bank sta! numbers. As one referee pointed out given that the ratio of total assets to number of employees for each banking system is
unlikely to be constant over the years under study. A price of labour measure using sta! expenses to number of employees may yield di!erent parameter
estimates from those reported in this study.

Q


Q


Q


P


0.0499

331.1
0.0148

Total cost (operating and "nancial cost) (ECU mil)

Price of labour (ECU mil) (total personnel expenses/
total asset)

Price of funds (%) (total interest expenses/total funds
(demand, saving, time interbank deposits, long-term
debt, subordinated debt and other))
Price of physical capital (%) (total depreciation and
other capital expenses/total "xed assets)
The value of total aggregate loans (all types of loans)
(ECU mil)
The value of total aggregate securities (short-term
investment, equity and other investments and public
sector securities) (ECU mil)
The value of the o!-balance sheet activities
(nominal values) (ECU mil)
The value of the total aggregate equities (ECU mil)

C
P


P


Mean

Description

Variables

Table 1
Descriptive statistics of the outputs and input variables used in the model, 1997
Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955
1941

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Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Table 2
Scale economies for European banks 1989}1996

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

1989

1990

1991

1992

1993

1994

1995

1996

1997

0.981
0.947
0.936
1.010
0.974
0.966
0.952
0.955
0.962
0.964
0.947
0.987
0.951
1.011
0.906
0.962

0.973
0.948
0.934
1.018
0.975
0.969
0.949
0.967
0.968
0.930
0.925
0.954
0.940
0.959
0.924
0.958

0.960
0.950
0.941
1.024
0.981
0.963
0.904
0.960
0.970
0.934
0.943
0.961
0.932
0.960
0.920
0.957

0.948
0.966
0.892
1.029
0.974
0.930
0.919
0.970
0.968
0.932
0.935
0.980
0.925
0.959
0.943
0.946

0.957
0.950
0.890
1.007
0.971
0.922
0.913
0.974
0.930
0.919
0.934
0.994
0.927
0.955
0.952
0.934

0.965
0.958
0.891
1.008
0.967
0.921
0.935
0.957
0.924
0.919
0.927
0.989
0.931
0.956
0.956
0.931

0.954
0.958
0.892
1.014
0.969
0.921
0.941
0.955
0.924
0.921
0.923
0.999
0.936
0.960
0.958
0.932

0.957
0.965
0.898
1.011
0.968
0.941
0.947
0.961
0.932
0.928
0.929
1.021
0.940
0.960
0.954
0.945

0.954
0.984
0.918
1.018
0.972
0.940
0.964
0.954
0.946
0.963
0.943
1.032
0.945
0.986
0.948
0.949

1}99.9

100}
199.9

200}
299.9

300}
499.9

500}
999.9

1000}
2499.9

2500}
4999.9

5000#

0.873
0.879
0.832
0.857
0.900
0.832
0.857
0.940
0.805
0.885
0.853
0.911
0.848
0.879
0.864
0.849

0.940
0.974
0.983
0.942
0.978
0.915
0.978
0.944
0.981
0.986
0.936
1.014
0.961
0.934
1.003
0.936

1.009
1.019
1.011
}
1.007
0.985
1.029
0.989
1.018
0.997
0.982
1.038
0.993
0.965
0.986
0.995

1.013
1.025
1.026
1.029
1.020
1.016
1.024
0.995
1.013
1.004
0.970
1.036
0.995
0.976
0.992
1.013

1.005
1.003
0.998
0.974
1.005
1.008
0.984
0.975
0.974
1.003
0.979
0.983
0.961
0.979
0.978
0.997

0.987
1.004
0.916
0.951
0.975
0.958
0.897
0.931
0.929
0.994
0.958
0.964
0.925
0.951
0.980
0.960

0.968
1.019
0.912
1.012
0.980
0.930
0.949
0.882
0.957
1.041
0.923
1.015
0.930
0.934
0.984
0.961

1.059
1.031
0.967
1.081
0.994
0.964
1.081
1.016
1.014
1.045
0.940
1.109
0.996
0.990
0.951
0.992

Asset sizes (ECU Mil)

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

Note: Bold typeface for values indicates signi"cantly di!erent from one at the 5% level.

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1943

Ine$ciency measures are given in Table 3 and they show greater variation
across time, countries and bank sizes than the scale economy estimates. The
country estimates reveal that the relative ine$ciency of various banking markets
(Finland, Luxembourg, Netherlands, and Sweden up to 1996) have increased
over time. The results also show that the banks in Sweden and the UK have
been on average, relatively ine$cient compared with other European banks.
The most e$cient banking sectors are those of Austria, Denmark, Germany and
Italy.
Table 3 also shows ine$ciency measures for di!erent sizes of banks. Apart
from in Austria, there appears to be no strong evidence that the largest banks
are systematically more e$cient than smaller banks. While there are observable
di!erences between size categories no trend is apparent. On average, X-ine$ciencies appear to range between 20% and 25% across di!erent size classes, and
this suggests that the same level of output could be produced with 75}80% of
current inputs if banks were operating on the e$cient frontier. This is in the
same range as those found in Resti (1997) and Gri!ell-Tatje and Lovell (1996).
Overall the above "ndings indicate that X-ine$ciencies are more important
than scale economies across European banking markets. The policy implication
therefore is that greater cost savings are to be obtained if banks focus their
attentions on reducing managerial, technological and other ine$ciencies, compared with increasing size. Nevertheless, there are still cost savings of between
5% and 7% that can be realised for small and some medium sized banks
through increasing output size.
Estimates of technical change are shown in Table 4. This shows that technical
change, has made a positive contribution across all banking markets, reducing
the real annual cost of production by about 3%. The impact of technical change
on reducing costs is shown to systematically increase with bank size. These
estimates, however, should be treated with caution given the problems associated with using a time trend to measure technical change (Hunter and Timme,
1991).

5. Conclusion
This paper extends the established literature on modelling the cost characteristics of banking markets by applying the #exible Fourier functional form and

 Ine$ciency results derived from the cost frontier speci"cation excluding the risk variable tended
to yield similar results. For instance, Austria, Denmark, Germany and Italy were also found to be
the most e$cient banking sectors, although e$ciency levels were found to be slightly lower. In
estimates derived from the standard cost frontier we also found more systems exhibiting increasing
ine$ciency over time. These results are also available from the authors on request.

1944

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Table 3
Average X-ine$ciency levels of banks in the EU 1989}1997

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

1989

1990

1991

1992

1993

1994

1995

1996

1997

0.209
0.369
0.222
0.193
0.288
0.218
0.280
0.166
0.217
0.234
0.213
0.335
0.234
0.194
0.298
0.245

0.212
0.355
0.215
0.192
0.264
0.209
0.256
0.266
0.218
0.246
0.204
0.314
0.234
0.232
0.324
0.241

0.189
0.356
0.227
0.208
0.262
0.202
0.227
0.269
0.231
0.246
0.206
0.298
0.238
0.288
0.312
0.241

0.202
0.320
0.202
0.239
0.265
0.186
0.249
0.252
0.219
0.251
0.222
0.308
0.219
0.313
0.333
0.233

0.201
0.239
0.196
0.294
0.270
0.170
0.247
0.278
0.205
0.245
0.227
0.319
0.220
0.328
0.314
0.209

0.186
0.228
0.202
0.259
0.269
0.162
0.242
0.289
0.211
0.229
0.248
0.265
0.227
0.431
0.302
0.200

0.200
0.234
0.195
0.294
0.266
0.161
0.235
0.289
0.217
0.254
0.257
0.289
0.246
0.410
0.303
0.202

0.205
0.236
0.194
0.292
0.275
0.158
0.236
0.303
0.192
0.243
0.252
0.280
0.237
0.439
0.289
0.202

0.181
0.322
0.191
0.296
0.244
0.135
0.238
0.323
0.126
0.330
0.238
0.289
0.237
0.165
0.298
0.179

1}99.9

100}
199.9

200}
299.9

300}
499.9

500}
999.9

1000}
2499.9

2500}
4999.9

5000#

0.313
0.291
0.182
0.379
0.288
0.164
0.234
0.432
0.163
0.244
0.255
0.239
0.272
0.383
0.337
0.212

0.207
0.264
0.191
0.190
0.269
0.152
0.297
0.238
0.181
0.254
0.211
0.306
0.229
0.346
0.301
0.182

0.159
0.239
0.184
}
0.286
0.159
0.256
0.206
0.208
0.243
0.195
0.314
0.208
0.272
0.280
0.192

0.171
0.213
0.211
0.179
0.260
0.165
0.209
0.457
0.205
0.263
0.173
0.270
0.212
0.303
0.343
0.197

0.148
0.257
0.217
0.348
0.267
0.167
0.192
0.255
0.188
0.290
0.242
0.344
0.207
0.326
0.310
0.206

0.112
0.283
0.202
0.373
0.236
0.169
0.253
0.250
0.282
0.305
0.195
0.289
0.228
0.371
0.229
0.215

0.098
0.262
0.251
0.212
0.264
0.163
0.233
0.302
0.254
0.289
0.255
0.313
0.206
0.300
0.264
0.232

0.160
0.254
0.287
0.257
0.249
0.167
0.252
0.310
0.210
0.231
0.294
0.309
0.266
0.345
0.333
0.249

Asset sizes (ECU Mil)

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

!0.039
!0.040
!0.029
!0.041
!0.032
!0.027
!0.039
!0.037
!0.026
!0.048
!0.039
!0.038
!0.026
!0.049
!0.033
!0.031

Austria
Belgium
Denmark
Finland

Asset sizes (ECU Mil)

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

1989

!0.026
!0.037
!0.023
!0.038

1}
99.9

!0.038
!0.043
!0.032
!0.045
!0.036
!0.031
!0.042
!0.035
!0.028
!0.049
!0.041
!0.044
!0.030
!0.057
!0.037
!0.035

1990

!0.034
!0.039
!0.026
!0.038

100}
199.9

!0.040
!0.044
!0.033
!0.048
!0.038
!0.033
!0.036
!0.036
!0.030
!0.049
!0.041
!0.043
!0.032
!0.061
!0.035
!0.037

1991

Table 4
Overall technical progress for European banks 1989}1997

!0.038
!0.040
!0.027
}

200}
299.9

!0.038
!0.042
!0.033
!0.050
!0.039
!0.033
!0.039
!0.035
!0.033
!0.048
!0.043
!0.044
!0.033
!0.060
!0.035
!0.037

1992

!0.040
!0.043
!0.028
!0.043

300}
499.9

!0.036
!0.041
!0.032
!0.045
!0.039
!0.032
!0.039
!0.038
!0.033
!0.044
!0.042
!0.043
!0.034
!0.060
!0.033
!0.035

1993

!0.036
!0.045
!0.031
!0.053

500}
999.9

!0.037
!0.040
!0.027
!0.046
!0.037
!0.032
!0.043
!0.038
!0.031
!0.043
!0.043
!0.043
!0.033
!0.056
!0.033
!0.034

1994

!0.051
!0.046
!0.035
!0.046

1000}
2499.9

!0.038
!0.041
!0.028
!0.048
!0.039
!0.033
!0.041
!0.043
!0.034
!0.045
!0.044
!0.044
!0.036
!0.057
!0.037
!0.035

1995

!0.050
!0.049
!0.048
!0.052

2500}
4999.9

!0.036
!0.040
!0.026
!0.046
!0.039
!0.034
!0.041
!0.044
!0.036
!0.044
!0.043
!0.043
!0.037
!0.061
!0.038
!0.036

1996

!0.045
!0.043
!0.047
!0.043

5000#

!0.038
!0.040
!0.023
!0.042
!0.036
!0.036
!0.040
!0.044
!0.037
!0.045
!0.048
!0.042
!0.035
!0.061
!0.042
!0.037

1997

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1945

1989

!0.032
!0.030
!0.037
!0.039
!0.029
!0.042
!0.034
!0.041
!0.031
!0.036
!0.030
!0.031

1990
!0.038
!0.033
!0.040
!0.029
!0.029
!0.049
!0.042
!0.049
!0.034
!0.038
!0.036
!0.034

1991
!0.041
!0.033
!0.038
!0.038
!0.029
!0.053
!0.040
!0.048
!0.031
!0.043
!0.037
!0.035

1992
!0.038
!0.035
!0.038
!0.042
!0.029
!0.049
!0.041
!0.048
!0.033
!0.053
!0.041
!0.036

1993

Note: Bold typeface for values indicates signi"cantly di!erent from zero at the 5% level.

France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

Table 4 (Continued ).

!0.037
!0.035
!0.042
!0.040
!0.036
!0.053
!0.049
!0.039
!0.031
!0.045
!0.039
!0.037

1994
!0.036
!0.036
!0.053
!0.042
!0.040
!0.053
!0.045
!0.039
!0.033
!0.061
!0.037
!0.038

1995
!0.042
!0.036
!0.042
!0.047
!0.042
!0.051
!0.056
!0.040
!0.035
!0.073
!0.036
!0.042

1996
!0.047
!0.046
!0.043
!0.037
!0.042
!0.047
!0.047
!0.041
!0.042
!0.067
!0.042
!0.046

1997

1946
Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Austria
Belgium
Denmark
Finland
France
Germany

Asset size

Number of banks
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

EU countries

1693
10 923
6540
10 264
13 669
10 435

17
21
24
7
145
137
7
3
121
37
10
8
93
7
23
660

1989

1507
11 312
6199
10 182
13 913
10 573

19
21
25
7
157
153
8
4
130
68
11
15
105
12
29
764

1990

1391
11 126
6447
11 356
13 888
8847

21
25
29
9
171
199
10
5
135
77
12
18
117
17
37
882

1991

Table 5
Number of banks and average asset sizes according to years

1072
9796
3188
10 960
7770
3835

32
43
54
9
354
554
14
8
158
94
43
36
124
21
105
1649

1992

2008
6172
4011
9114
7420
1947

39
75
77
11
414
1436
17
12
266
129
50
37
135
21
132
2851

1993

2939
5753
3526
7774
7182
1706

57
86
92
12
426
1859
21
15
286
141
58
38
139
26
138
3394

1994

3054
7421
3212
11 405
7817
1857

93
95
107
11
423
1853
21
14
329
138
62
44
139
28
137
3494

1995

3459
8406
3563
11 196
8912
2451

84
91
103
11
394
1543
20
13
304
130
55
43
179
25
131
3126

1996

4304
14 040
2440
19 870
10 848
2942

81
67
88
12
328
1588
24
26
313
119
48
40
146
17
120
3017

1997

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1947

1989

1155
5926
5585
3410
10 800
1534
4314
18 931
30 702
9222

EU countries

Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

Table 5 (Continued).

931
5320
6021
2018
14 495
917
4708
19 476
26 449
9046

1990
752
4399
6121
1770
14 866
1646
4541
17 525
22 820
8623

1991
1238
6144
5786
1551
12 519
2767
4525
14 182
11 796
5739

1992
2191
4837
4624
1204
14 437
3641
4751
14 070
10 725
4036

1993
2267
4518
4564
1170
12 825
3387
4778
11 411
10 808
3601

1994
2400
6005
4040
1241
13 249
3795
4887
11 138
11 958
3852

1995
2520
7435
3963
1404
17 007
4468
4008
13 117
13 350
4573

1996
2708
5397
5046
3226
23 641
5362
5290
22 270
15 059
5452

1997

1948
Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1949

Table 6
Number of banks according to asset sizes (ECU Mil)
EU countries

1}99.9

100}
199.9

200}
299.9

300}
499.9

500}
999.9

1000}
2499.9

2500}
4997.9

5000#

All

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
All

31
79
202
0
245
1000
12
0
244
270
16
19
118
3
74
2313

68
69
96
2
266
1869
30
1
204
96
35
18
81
8
71
2914

54
40
74
1
207
1300
14
4
151
74
26
16
89
9
54
2113

71
48
72
5
241
1399
12
2
239
124
40
31
78
8
68
2438

62
46
29
17
394
1697
24
11
391
114
35
47
191
13
83
3154

77
96
24
12
558
1224
15
46
351
112
66
46
272
30
127
3056

37
35
38
4
423
398
19
13
144
54
45
46
126
17
131
1530

43
111
64
48
478
435
16
23
318
89
86
56
222
86
244
2319

443
524
599
89
2812
9322
142
100
2042
933
349
279
1177
174
852
19 837

stochastic cost frontier methodologies to estimate scale economies, X-ine$ciencies and technical change for a large sample of European banks between
1989 and 1997. The results reveal that scale economies are widespread
for smallest banks and those in the ECU 1 billion to ECU 5 billion assets size
range. Typically, scale economies are found to range between 5% and 7%,
while X-ine$ciency measures appear to be much larger, between 20% and
25%. X-ine$ciencies also appear to vary to a greater extent across di!erent
markets, bank sizes and over time. This suggests that banks of all sizes can
obtain greater cost savings through reducing managerial and other ine$ciencies. This paper also shows that technical progress has had a similar in#uence
across European banking markets between 1989 and 1997, reducing total costs
by around 3% per annum. The impact of technical progress in reducing bank
costs is also shown to systematically increase with bank size. Overall, these
results indicate that Europe's largest banks bene"t most from technical progress
although they do not appear to have scale economy advantages over their
smaller counterparts.

 Note that in estimates derived from the standard cost frontier speci"cation that excludes the
equity capital variable, we "nd evidence of large scale economies for large banks. These results,
available from the authors, suggest that controlling for risk in the cost estimation can have
a substantial impact on scale economy estimates for di!erent size banks.

1950

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Table 7
Descriptive statistics of total assets 1989}1997
EU countries

Mean

Median

StDev

Min

Max

Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK

443
524
599
89
2812
9322
142
100
2042
933
349
279
1177
174
852

2912
8654
3722
11 512
9175
2150
2050
5 571
4823
1 719
15 305
3557
4641
14 785
13 682

494
713
201
6946
1092
344
540
1668
724
342
1551
1141
1124
4203
1744

8237
22 512
10 945
14 675
33 914
14 886
3858
8692
14 028
3848
44 143
5560
11 445
18 672
34 899

9
6
8
105
4
9
28
198
10
2
19
34
5
84
18

96 452
160 461
65 950
88 505
341 303
456 292
22 821
40 747
127 957
23 768
338 751
31 232
117 330
82 802
235 175

Table 8
Maximum likelihood parameter estimation of the cost frontier
Variables

Parameters

Coe$cients

Standard error

Constant
ln Q

ln Q

ln Q

ln E
ln P

ln P

ln Q ln Q /2


ln Q ln Q


ln Q ln Q


ln Q ln E

ln Q ln Q /2


ln Q ln Q


ln Q ln E

ln Q ln Q /2


ln Q ln E

Ln E ln E/2
ln P ln P /2


ln P ln P


ln P ln P /2


ln P ln Q


ln P ln Q


ln P ln Q


ln P ln E

ln P ln Q


ln P ln Q


ln P ln Q


ln P ln E






















 

























 







 


!0.2113
0.4939
0.4474
0.0044
0.0109
0.2393
0.7283
0.0297
!0.0609
0.0135
0.0341
0.0454
0.0117
0.0120
0.0034
!0.0008
!0.0138
0.1138
!0.2190
0.1841
!0.0199
!0.0045
!0.0012
0.0255
0.0321
0.0242
!0.0098
!0.0353

0.01004
0.00368
0.00424
0.00358
0.00527
0.00524
0.00601
0.00038
0.00072
0.00050
0.00107
0.00052
0.00043
0.00113
0.00039
0.00070
0.00111
0.00201
0.00328
0.00320
0.00093
0.00099
0.00091
0.00148
0.00094
0.00084
0.00085
0.00166

t-Ratio
!21.042
134.056
105.407
1.229
2.070
45.648
121.172
78.127
!84.944
26.834
31.915
87.521
27.155
10.665
8.627
!1.147
!12.403
56.634
!66.699
57.445
!21.394
!4.563
!1.314
17.249
34.296
28.977
!11.542
!21.292

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

1951

Table 8 (Continued).
Variables

Parameters

Coe$cients

Standard error

t-Ratio

H/2
ln Q

ln Q

ln Q

Ln E
ln P

ln P

cos(z )

sin(z )

cos(z )

sin(z )

cos(z )

sin(z )

cos(z )

sin(z )

cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )


cos(z #z )


sin(z #z )














 

 

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

a

b

u/v
v














 

 


!0.0142
!0.0016
!0.0028
0.0020
!0.0010
0.0016
0.0110
!0.0149
!0.0618
!0.0170
!0.0096
!0.0264
!0.0024
!0.0023
0.0163
!0.0280
0.0015
0.0247
!0.0043
0.0070
!0.0226
!0.0011
!0.0024
!0.0183
!0.0258
0.0081
0.0035
!0.0040
!0.0099
!0.0102
!0.0004
!0.0153
0.0146
0.0104
0.0143
!0.0060
3.1954
0.3006
0.0324
0.1052
0.0349
!0.1401
!0.0122
!0.0197
0.0110
0.0099
0.0039

0.00279
0.00022
0.00040
0.00038
0.00038
0.00057
0.00062
0.00073
0.00364
0.00254
0.00414
0.00300
0.00310
0.00409
0.00275
0.00346
0.00241
0.00244
0.00272
0.00253
0.00254
0.00281
0.00296
0.00260
0.00228
0.00195
0.00238
0.00251
0.00254
0.00265
0.00245
0.00228
0.00258
0.00281
0.00216
0.00257
0.02138
0.00112

!5.098
!7.146
!6.959
5.290
!2.651
2.824
17.826
!20.301
!16.968
!6.695
!2.318
!8.805
!0.775
!0.562
5.918
!8.083
0.623
10.139
!1.582
2.769
!8.907
!0.391
!0.811
!7.046
!11.308
4.145
1.468
!1.596
!3.898
!3.850
!0.163
!6.712
5.656
3.699
6.616
!2.336
149.488
267.262

ln P

ln P ln P


ln P ln P


ln P ln P /2


ln P ln Q


ln P ln Q


ln P ln Q /2


ln P ln E

ln P


1952

Y. Altunbas7 et al. / European Economic Review 45 (2001) 1931}1955

Given that only a limited number of studies have investigated X-ine$ciencies

in European banks we suggest that a possible area for future research could be
to investigate whether similar relationships hold for banks which have di!erent
ownership characteristics, such as mutual and public banks. It may also be
interesting to evaluate the impact of alternative risk and output quality factors
as well as macro-economic cycles on the production characteristics of European
banks.

Appendix A
This appendix provides details on asset sizes and cost frontier (Tables 5}8).

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