How Market Competition and Stability in the Banking Sector Affect Total Factor Productivity Changes: Evidence from a Panel of European Union Banks

Abstract

This paper contributes to the literature by first employing a Data Envelopment Analysis (DEA) approach to measure bank efficiency. The results, presented through Malmquist indices, analyse changes in technical, technological, and scale efficiency across a panel of 784 relevant banks from all 27 European Union (EU) countries between 2006 and 2021. In the second stage, the study utilises panel dynamic Generalized Method of Moments (GMM) estimations to assess the impact of bank market competition (measured using the estimated Boone indicator) and bank stability (represented by the estimated Z-score) on total productivity changes. This analysis controls for various relevant bank activities, economic growth, and the influence of significant crises that affected the EU banking sector during the study period. The principal findings suggest that while bank market competition appears to foster enhancements in total factor productivity, variables such as bank loans, bank deposits and short-term funding, bank market stability, and economic growth do not demonstrate a clear contribution to changes in total factor productivity for the considered banks.