Cost and profit efficiency in the Spanish banking sector (1985–1996): a non-parametric approach

Abstract

The aim of this article is to analyse the efficiency in costs and in profits of the Spanish banking sector (SBS) in the period 1985–1996 using a non-parametric approach. The results obtained show the existence of profit efficiency levels well below those corresponding to cost efficiency, alternative profit efficiency being below standard profit efficiency. These results imply the existence of market power in the setting of prices and/or the existence of differences in the quality of bank output reflected in the differences in prices. With regard to the immediate future, of full economic and monetary integration, the reduction of profit levels associated with higher competitive pressure may be offset by the reduction of all kinds of inefficiency, which is a very important potential source of competitiveness. Indeed, the results referring to 1996 indicate that the return on assets (ROA) and on equity (ROE) of the SBS could increase by 2.4% and 24.4% respectively, eliminating the combined inefficiency in costs and revenues.