During The Financial Crisis The Eu Banking Cost Efficiency And Profit Efficiency Empirical Research

The global financial crisis generated from sub-prime mortgage crisis in United States hit the whole world in2008and the financial industry has been attacked heavily since the end of2007. Potential threatens and risks exist deeply in global banking sector. Since European banks held lots of sub-prime debt before the crisis, the profit of banks decrease sharply and some large commercial banks are confronted with great losses. Banking sector is one of the most important of financial industry and guarantees the smooth and stable development of macro economy. The condition of European banking sector is tightly connected with the real economy, so it’s necessary to conduct banking performance evaluation. Cost efficiency and profit efficiency are regarded as the most useful tools to evaluate the performance of banks, which are the objectives and targets of this paper.This article chooses2004-2010as the research period, containing the time before crisis, the outbreak period and post crisis era. In the context, we select334commercial banks in Germany, France, Italy, Spain and the Great Britain as samples. After the comparison of parametric and nonparametric approaches to estimate cost and profit frontier, stochastic frontier approach exhibits its advantage and is used in the empirical analysis of this paper. Then the translog function is accepted as the format of cost and profit function. For the specific function, we adopt price of inputs (price of labour, price of funds and price of physical capital), outputs (loans, other earning assets and off-balance items) and country-level variables (per-capita GDP, nominal interest rates, density of deposits and market ration) as the independent variables. Through the estimation of parameters in the translog function, we try to find the relationship among these variables and cost and profit.The empirical results demonstrate some characteristics of cost and profit efficiency of these five countries during the period of2004-2010. From the aspect of the whole period, the profit efficiency score is higher than cost efficiency score in all countries, which means that banks in these five countries are more efficient in generating profit than controlling costs. Also it’s found that the existence of market power causes the high banking market ration in Europe, and the high ration is companied with high cost and profits. Besides, profit efficiency is affected by crisis more directly and seriously than cost efficiency:the profit efficiency scores decrease significantly in all nations while cost efficiency scores keep the rise trend although there is some volatility. From the aspect of nations, the bank efficiency in different countries has large divergence. In more developed countries, performance of profit efficiency is better than cost efficiency, such as Germany, France and the Great Britain. During the period of crisis and recover time, the efficiency levels of banks Germany are more stable than other countries; banks in Spain show the serious turbulence no matter for cost or profit efficiency; cost and profit efficiency of banks in GB both descend in2009-2010and it’s the unique nation which exhibits down trend of cost efficiency.The empirical results of this paper verify the inconsistence of cost and profit efficiency and reveal the difference of efficiency performance among these five countries; meanwhile, it supplies some suggestions for regulation policy and points out the importance of causes of high market ratio. It’s not necessary to decrease the banking market ratio but encouragement of market compete is important. It’s reasonable to control the monopoly banks due to the existence of market power and increase the profit efficiency based on the rise of cost efficiency.