"This paper analyses the relationship between capital, risk and efficiency for a large sample of European banks between 1992 and 2000. In contrast to the established US evidence we do not find a positive relationship between inefficiency and bank risk-taking. Inefficient European banks appear to hold more capital and take on less risk. Empirical evidence is found showing the positive relationship between risk on the level of capital (and liquidity), possibly indicating regulators' preference for capital as a mean of restricting risk-taking activities. We also find evidence that the financial strength of the corporate sector has a positive influence in reducing bank risk-taking and capital levels. There are no major differences in the relationships between capital, risk and efficiency for commercial and savings banks although there are for co-operative banks. In the case of co-operative banks we do find that capital levels are inversely related to risks and we find that inefficient banks hold lower levels of capital. Some of these relationships also vary depending on whether banks are among the most or least efficient operators." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Studies of banking competition and competitive behaviour both within and across countries typically utilise only one of the few measures that are available. In trying to assess the relative competitive position of banking markets in 14 European countries, we find that the existing indicators of competition often give conflicting predictions, both across countries and over time. Seeking greater consistency, we attempt to separate bank pricing power from other, non-core, influences embodied in competition measures. While there is some improvement in cross-country consistency, the main result is that our measure of bank pricing power suggests that banking market competition in Europe may well be stronger than implied by traditional measures and analysis.

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This study aims to contribute to the established literature by using the Fourier £exible functional form and stochastic cost frontier methodologies to estimate scale economies and X-ine¤ciencies for a large sample of European savings banks between 1989 and 1996. In their extensive review of the bank e¤ciency literature, Berger and Humphrey note that the volume of European studies has not matched that of the USA and there exists a paucity of cross-country studies. Whereas scale economies are widespread and positively related to bank size, we ¢nd no evidence of a signi¢cant relationship between size and X-e¤ciency. Generally, scale economies are found to range between 7 and 10 per cent, while X-ine¤ciency measures appear to be much larger, around 22 per cent. These results suggest that European savings banks can obtain cost reductions through reducing managerial and other ine¤ciencies and also by increasing the scale of production.