Competition and efficiency in the Spanish banking sector: the importance of specialization

Abstract

This paper analyses the importance of productive specialization in explaining cost efficiency differences between banking companies. Taking as reference the Spanish banking sector during the period 1985–1996, the study shows that if cost efficiency measurements are corrected for the effect of different specialization by the estimation of separate frontiers for four different groups of competitors, the efficiency of companies improves. The behaviour of costs would thus be compatible with that of other competition indicators, reflecting the effects of a more competitive situation in the Spanish banking sector at present than at the start of the period considered.