The nexus between competition and efficiency: The European banking industries experience

• In our study we investigate the evolution and convergence of competition in EU 27 banking systems for the period 2004–2010.
• We test the validity of the Competition–Efficiency Hypothesis analyzing the impact of banking competition on efficiency.
• The results show that in the EU the convergence process occurs from the banking systems with a higher competition level.
• Empirical results provide evidence of convergence in terms of banking competition among the EU countries.
• Our findings confirm the Competition–Efficiency Hypothesis in terms of cost and profit efficiency.

In this paper, we investigate competition in banking systems in the EU27 as a whole for the period 2004–2010, but also for old members’ banking systems compared with new members’ banking systems and for banking systems from countries member of euro zone compares with banking systems from countries non-member of euro zone. In order to investigate this issue, we estimate a non-structural indicator of banking competition, using the H-statistic indicator that is estimated using bank-level data. Also, we apply two tests of convergence, β- and σ-convergence, for assessing competition evolution during the specified period. We want to fill the gap in the banking literature testing the validity of the Competition–Efficiency Hypothesis, analysing the impact of the banking competition measures on two alternative measures of efficiency, cost and profit efficiency, in the European banking systems in a Granger-causality manner. The results confirm us that in the EU the convergence process occur from the banking systems with higher competition level than the mean score of all countries. The evidence for all groups of countries, except non-euro zone group, where results are not statistically significant, confirm the Competition–Efficiency Hypothesis in terms of cost and profit efficiency.