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 parametric approach. In particular, the specific environmental conditions of each country play an important role in the definition and specification of the common frontier of different countries. Our results suggest that, without environmental variables, the cost-efficiency scores of Spanish banks are quite low compared to those of the French banks. However, when environmental variables are included in the model, the differences between both banking industries are reduced substantially. Overall, our results demonstrate that environmental variables contribute significantly to the difference in efficiency scores between the two countries. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification. O2; G2; G21; F36; L5.