Banking performance and technological change in non-core EU countries: A study of Spain and Portugal

Abstract

The purpose of this paper is to investigate the cost efficiency of banks operating in two "non-core" EU countries, Portugal and Spain, over a number of years. Specifically, the paper aims to examine the extent to which banks' efficiency is influenced by their portfolio orientation and scale of operation. Data envelopment analysis is used to identify banks' levels of performance over time in both countries. In order to decompose banks' total factor productivity change into technological, scale efficiency and pure efficiency changes, the Malmquist index method is applied. Banks operating in both countries have improved their performance over time and savings banks and large banks, in particular, have tended to outperform other types of banks. Banks operating in Spain tend to perform better than in Portugal and Spanish-owned banks perform better than their Portuguese-owned counterparts. The improvements in performance revealed have mainly been due to technological change. Bankscope is a well- respected data source and has been the basis of many studies of performance in international banking. Unfortunately, owing to data deficiencies, around 20 per cent of the banks operating in Portugal and Spain were not included. Practical implications - If Portuguese banks are to be competitive internationally, there is considerable need for efficiency improvements. The paper provides insights into the dynamics of the Portuguese and Spanish banking systems. The results should be of interest to management in banking and bank regulators in Europe, and economists and others studying bank performance trends. The research reported may shed light on some of the challenges facing the banking sectors of the "new" EU states (such as Poland and Hungary).