Does Financial Integration Increase Bank Efficiency? New Evidence From the Euro area

European Financial Integration

Abstract

This paper aims to estimate the relationship between bank's cost and profit efficiency and financial integration, which we defined as five groups of competition, bank market ownership, financial liberalization, free capital flow, and the euro area control variables. A two-step quantitative research design was employed to accomplish purpose of the current paper for an unbalanced pooled time series dataset of 126 banks of the euro area banking system between 1999 and 2012 : Data Envelopment Analysis (DEA) and panel regression analysis (GMM regression model). The results suggest that concentration ratio, foreign ownership, domestic credit, and market integration are negatively related to bank's cost and profit efficiency while the coefficient of real credit growth and capital flow have a positive relationship to cost and profit efficiency score. Furthermore, empirical findings of bank market power, government budget deficit targeting, and public debt targeting are consistent in both cost and profit efficiency models. Therefore, the government budget deficit has a positive impact on cost efficiency without assurance of sound public finance policy which is important to ensure sustainable economic development within the euro area. criteria relating to government deficit needs to adjustment for the euro area adopted Member States because, by increasing the difference of actual from targeted value of government budget deficit; bank cost efficiency will be increased.