Cost Economies in Eu Banking Systems
NORTH- ~)IJAND
Cost Economies in EU Banking Systems
Yener Altunbas and Philip Molyneux
This paper examines the cost structure of four EU banking systems using the translog cost function methodology. The results indicate strong evidence of economies of scale across all output sizes for the French, German and Spanish systems. In contrast, the Italian system appears to exhibit constant and diseconomies of scale. Costs also appear to be subadditive across all output ranges apart from the Italian system. These results tentatively suggest that scale economies and the benefits of size could be important in generating economic gains in EU banking markets under the single market programme.
Keywords: European banking; Cost economies JEL classification: G21
I. I n t r o d u c t i o n
The Commission of the European Communities (7988) stressed in its 1992 single market programme that substantial benefits would accrue to those sectors which can benefit from positive supply-side effects. In particular, 'price reductions occasioned by competitive pressures will force firms 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 economies, however, few studies have investigated cost characteristics in European banking and no studies, as far as we are aware, have provided crosscountry comparisons. This paper aims to redress this imbalance by using the translog cost function methodology to evaluate evidence of scale economies and expansion path subadditivity in four large EU banking markets: France, Germany, Italy and Spain. The major conclusions from our study are as follows. Cost economies appear to be prevalent across all bank size classes in the German, French and Spanish
School of Accounting, Banking and Economics, University College of North Wales, Bangor, Gwynedd, United Kingdom (YA and PM). Address
Cost Economies in EU Banking Systems
Yener Altunbas and Philip Molyneux
This paper examines the cost structure of four EU banking systems using the translog cost function methodology. The results indicate strong evidence of economies of scale across all output sizes for the French, German and Spanish systems. In contrast, the Italian system appears to exhibit constant and diseconomies of scale. Costs also appear to be subadditive across all output ranges apart from the Italian system. These results tentatively suggest that scale economies and the benefits of size could be important in generating economic gains in EU banking markets under the single market programme.
Keywords: European banking; Cost economies JEL classification: G21
I. I n t r o d u c t i o n
The Commission of the European Communities (7988) stressed in its 1992 single market programme that substantial benefits would accrue to those sectors which can benefit from positive supply-side effects. In particular, 'price reductions occasioned by competitive pressures will force firms 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 economies, however, few studies have investigated cost characteristics in European banking and no studies, as far as we are aware, have provided crosscountry comparisons. This paper aims to redress this imbalance by using the translog cost function methodology to evaluate evidence of scale economies and expansion path subadditivity in four large EU banking markets: France, Germany, Italy and Spain. The major conclusions from our study are as follows. Cost economies appear to be prevalent across all bank size classes in the German, French and Spanish
School of Accounting, Banking and Economics, University College of North Wales, Bangor, Gwynedd, United Kingdom (YA and PM). Address
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