How the environment determines banking efficiency: A comparison between French and Spanish industries

This paper investigates the influence the environmental conditions have on the cost-efficiency of French and Spanish banking industries. We propose a new methodology for cross-country comparisons of efficiency using a paramet ric approach. In particular, the specific environmental conditions of each country play an important role in the definition and specification of the c ommon frontier of different countries. Our results suggest that, without en vironmental variables, the cost-efficiency scores of Spanish banks are quit e low compared to those of the French banks. However, when environmental va riables are included in the model, the differences between both banking ind ustries are reduced substantially. Overall, our results demonstrate that en vironmental variables contribute significantly to the difference in efficie ncy scores between the two countries. (C) 2000 Elsevier Science B.V. All ri ghts reserved. JEL classification. O2; G2; G21; F36; L5.