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a b s t r a c tIn this study, we test whether regional growth in 11 European countries depends on financial development and suggest the use of cost-and profit-efficiency estimates as quality measures of financial institutions. Contrary to the usual quantitative proxies of financial development, the quality of financial institutions is measured in this study as the relative ability of banks to intermediate funds. An improvement in bank efficiency spurs five times more regional growth then an identical increase in credit does. More credit provided by efficient banks exerts an independent growth effect in addition to direct quantity and quality channel effects.

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Recent developments on international financial markets have called the benefits of bank globalization into question. Large, internationally active banks have acquired substantial market power, and international activities have not necessarily made banks less risky. Yet, surprisingly little is known about the actual link between bank internationalization, bank risk, and market power. Analyzing this link is the purpose of this paper. We jointly estimate the determinants of risk and market power of banks, and we analyze the effects of changes in terms of the number of foreign countries (the extensive margin) and the volume of foreign assets (the intensive margin). Our paper has four main findings. First, there is a strong negative feedback effect between risk and market power. Second, banks with higher shares of foreign assets, in particular those held through foreign branches, have higher market power at home. Third, holding assets in a large number of foreign countries tends to increase bank risk. Fourth, the impact of internationalization differs across banks from different banking groups and of different size.

We investigate the consistency of efficiency scores derived with two competing frontier methods in the financial economics literature: Stochastic Frontier and Data Envelopment Analysis. We sample 34,192 observations for all German universal banks and analyze whether efficiency measures yield consistent results according to five criteria between 1993 and 2004: levels, rankings, identification of extreme performers, stability over time and correlation to standard accounting-based measures of performance. We find that non-parametric methods are particularly sensitive to measurement error and outliers. Furthermore, our results show that accounting for systematic differences among commercial, cooperative and savings banks is important to avoid misinterpretation about the status of efficiency of the total banking sector. Finally, despite ongoing fundamental changes in Europe's largest banking system, efficiency rank stability is very high in the short run. However, we also find that annually estimated efficiency scores are markedly less stable over a period of twelve years, in particular for parametric methods. Thus, the implicit assumption of serial independence of bank production in most methods has an important influence on obtained efficiency rankings.Keywords: Cost Efficiency, Banks, Stochastic Frontier Approach, Data Envelopment Analysis JEL: D24, G21, L25 Non-technical summaryTo measure the cost efficiency of banks, one should compare observed cost-and output-factor combinations with optimal combinations determined by the available technology (efficient frontier). The method to implement this analysis could be either stochastic or deterministic. The former allows random noise due to measurement errors. The latter, on the contrary, attributes the distance between an inefficient observed bank and the efficient frontier entirely to inefficiency. A further distinction is made between parametric or non-parametric approaches. A parametric approach uses econometric techniques and imposes a priori the functional form for the frontier and the distribution of efficiency. A non-parametric approach, on the contrary, relies on linear programming to obtain a benchmark of optimal costand production-factor combinations.The most popular methods are Stochastic Frontier Analysis (SFA), which is stochastic and parametric, and Data Envelopment Analysis (DEA), which is deterministic and non-parametric. This study analyses on the basis of five criteria to what extent SFA and DEA yield consistent cost efficiency (CE) measures when applied to the same dataset. In particular, we check to what extent they provide different efficiency scores when stratifying the sample according to year, banking group or both dimensions simultaneously.Our results show very low consistency between SFA and DEA measures, especially when applied to the entire panel sample. First, mean CE according to SFA is substantially higher compared to DEA. This difference becomes smaller when stratifying the sample according to year, banking group or both dimensi...

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With this paper we seek to contribute to the literature on the relation betweennance and growth. We argue that most studies in the eld fail to measure the quality of nancial intermediation but rather resort to using proxies on the size of nancial systems. Moreover, cross-country comparisons suer from the disadvantage that systematic dierences between markedly dierent economies may drive the result that nance matters. To circumvent these two problems we examine the importance of the quality of banks' nancial intermediation in the regions of one economy only: Germany. To approximate the quality of nancial intermediation we use cost eciency estimates derived with stochastic frontier analysis. We nd that the quantity of supplied credit is indeed insignicant when a measure of intermediation quality is included. In turn, the eciency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between dierent banking pillars active in Germany.