An assessment of Portuguese banks’ efficiency and productivity towards euro area participation
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This paper analyses the production technology of Portuguese banks during the 1992–2006 period through the estimation of a translog cost frontier. This period is of major interest because it covers Portugal’s euro area accession and its impact on the banking system. Hence, critical factors impacting the banking system are identified against the background of increasing financial integration prior to the financial crisis that started in 2007 and later translated into strains in some European sovereign debt markets. Banks are modelled as firms which produce loans and other earning assets, choosing the cost minimizing combination of labour, capital and interest bearing debt, subject to holding a predetermined level of equity. According to the results of this study, technological progress has shifted the cost frontier downwards throughout the period under consideration, whereas the distance at which banks have operated from the frontier seems to have remained constant. Further, increases in production under scale economies have also contributed to the recorded increase in productivity.
KeywordsBank performance Marginal costs X-efficiency Total factor productivity change
JEL ClassificationG21 L13
We are grateful to Diana Bonfim for helpful comments and suggestions provided since early stages of this work. Comments and suggestions provided by Mário Centeno, Filipa Lima, Pedro Pita Barros and seminar participants at the EWG-EPA 2010 Conference are also gratefully acknowledged. Any errors or omissions remain our own.
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