Banking Efficiency in Non-Core EU Countries-A Comparative Analysis of Portugal and Spain

The process of privatisation and deregulation in EU banking may be expected to have had an important impact on the business performance of Portuguese and Spanish banks which, until the second half of the 1980s, were generally regarded as being uncompetitive internationally. This paper provides a comparative analysis of the cost efficiency of banks operating in these two 'non-core' EU countries over a number of years and, specifically, it examines to what extent efficiency is influenced by their portfolio orientation and scale of operation. We report that banks operating in both countries have improved their performance over time and that savings banks and large banks in particular have tended to outperform other types of banks. Moreover, we also show that banks operating in Spain tend to perform better than Portuguese banks and that the gap in performance has been sustained. The study also provides evidence that the improvements in performance revealed have mainly been due to technological change. The results have important implications for the management of banks, for policy makers and bank regulators in Europe, as well as economists and other studying trends in bank performance internationally. In particular, if Portuguese banks are to be competitive internationally, there is considerable scope for efficiency improvements. Finally, the results may have particular relevance for some of the new member states of the EU, given that they too fall outside the 'core' of Europe's banking industry.