Key factors of European banking efficiency: an application of DEA methodology

Purpose The banking sector is one of the main drivers of any developed economy and the decisions of individual banks can have global consequences on markets. In recent decades, the European banking sector has undergone major transformations, including restructuring, mergers and changes in regulation and supervision. This has attracted the interest of academics and policymakers alike. The purpose of this paper is to analyze the efficiency in the European banking sector, but there is no consensus in the literature on which factors of banks affect their efficiency. Design/methodology/approach This study analyzes data from the consolidated financial statements of a sample of 471 banks over the period 2005–2022 from 39 countries. Two methodologies are applied: data envelopment analysis methodology for the calculation of efficiency, both input- and output-oriented, and Tobit regression model to determine which variables significantly affect banks’ efficiency scores. Findings The results show that the efficiency scores are similar in the input-oriented and output-oriented model. The Tobit model shows that the variables that positively affect efficiency are the ROA, size, capital ratio and liquidity. On the other hand, the variables that decrease the extent of efficiency are the provisions ratio and the fact of being a financial entity under the Single Supervisory Mechanism. Originality/value The main contribution of this study is a more comprehensive and global approach that includes aspects of the most important insights from the previous literature, over a very extended period and including bank and macroeconomic environment characteristics.