Efficiency and Its Impact on the Performance of European Commercial Banks

Abstract

The paper empirically analyzes the impact of the degree of efficiency on key performance fig-ures of publicly traded European banks in the period from 2005 to 2009. Efficiency is meas-ured by constructing non-parametric frontiers using the technique of data envelopment analysis on the cost, revenue, and profit sides. Decomposition of overall efficiency provides a detailed insight into effective risk and performance drivers in the banking industry. The results of our paper suggest that an increase in pure technical efficiency is related to more volatile assets, which is reflected in lower market values. Allocative and scale efficiency, however, boost capi-tal market performance.