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How output diversification affects bank efficiency and risk: an intra-EU comparison study.

Papanikolaou, N.I., 2009. How output diversification affects bank efficiency and risk: an intra-EU comparison study. In: Productivity in the Financial Services Sector. Central Bank of Luxembourg/SUERF Studies 4. Brussels: Editions Larcier, 245 - 273.

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This paper examines how banks have been diversifying away from traditional financial intermediation activity into noninterest income business and how this shift has affected their efficiency and risk-taking behaviour. To this end, we construct a global best-practice efficiency frontier following the Stochastic Frontier Approach and relying on the technique of Battese and Coelli (1995), which permits the estimation of the frontier and of the coefficients of efficiency variables in a single-stage. We opt for an application of this model to the EU-27 countries performing an intra-Union comparison between the old and the new EU members that provides us with substantial information concerning the level of harmonization of the European banking systems. Results indicate that the diversification of bank output enlarges efficiency margins in both cost and profit terms without altering the way banks treat risk. Also, environment identically affects the performance of European banks. By and large, both old and new EU member states follow similar behavioural patterns that are not influenced by product diversification, which reveals a rather harmonized European banking market.

Item Type:Book Section
Series Name:SUERF Studies 4
Uncontrolled Keywords:product diversification; bank efficiency; risk-taking; EU banking
Group:Bournemouth University Business School
ID Code:29777
Deposited By: Symplectic RT2
Deposited On:26 Sep 2017 11:53
Last Modified:14 Mar 2022 14:07


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