This thesis investigates the cost efficiencies of the commercial banks across 16 European countries for the years 1994-2003. In the conventional studies, the cost efficiency of a bank employing one type of technology is unable to be directly comparable with other banks employing different types of technology. The adoption of the meta-frontier function provides a possible solution to this problem.
The model, proposed by Battese et al. (2004), assumes that there is only one data-generation process for the banks operating under a given technology for each country.
We first introduce the stochastic cost frontier model to the banking industry for each country.
Next, the meta-frontier cost function is defined as a deterministic parametric function such that its parameter values must be less than or equal to the deterministic components of the stochastic cost frontier of the different countries involved. It is interesting to note that the methodology proposed allows for analyzing the TGR among countries by using a decomposition technique. The TGR mainly evaluates the degree of technology gap for the country whose currently available technology adopted by its banks lags behind the technology available for all countries. Then, we measure the TGR of the banks by using the ratio of the potential cost that is defined by the meta-frontier function to the cost for the frontier function for their country given the observed outputs and input prices.
According to the empirical results, we note that all European countries’ banks are exploiting different types of technology. This means that a meta-frontier model may be an appropriate choice for this kind of the cross country study. Broadly speaking, there is substantial variability in the technology gap ratios for banks in all European countries. Many banks are found to adopt the inferior technology in some countries. As the European financial markets become more competitive and highly integrated, it is obvious to see that each country’s banking competitive viability will be greatly determined by its improvability on technology.
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