The Impact of Risk Exposure and Environmental Conditions on European Banking Efficiency

ABSTRACT This study investigates the determinants of bank cost efficiency in Europe by applying a dynamic Bayesian stochastic frontier approach. We distinguish between two conceptually and empirically separate components of efficiency: (1) an intrinsic component, driven by internal bank features such as size and risk exposure, and (2) an extrThis study investigates the determinantsnsic component, shaped by broader sectoral and macroeconomic conditions. The results confirm that cost efficiency is significantly influenced by intrinsic factors, as well as by environmental conditions. The relative influence of intrinsic and extrinsic factors varies across countries and over time, highlighting the importance of context‐specific and adaptive policy and managerial responses.