Analyzing the Efficiency of European Banks

Abstract

Basic financial and profitability ratios such as net interest margin, return on assets, and return on equity alone do not measure bank performances effectively as they lack the risks associated. Since the success of banks in managing performance is expected to be largely dependent on the correct pricing and management of risks, a proper measurement of efficiency should include the effects of risks. The purpose of this study is to benchmark risk profiles of European commercial banks and performance indicators during the 2006-2009. The research is implemented based on four models by Data Envelopment Analysis with data of 697 banks from 37 countries. The results suggest that there is an extensive inter- and intra-country risk efficiency of banks. Profitability increase is not always directly proportional to risk increase, and the financial crisis substantially decreased the risk efficiency of banks, especially in 2008 in developed economies.