Review of Industrial Organization 20: 163–181, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Cost Efﬁciency and Product Mix Clusters across the
Spanish Banking Industry
Departament d’Economia, Universitat Jaume I, Campus del Riu Sec, 12071 Castelló de la Plana,
Abstract. The competitive conditions under which Spanish banking ﬁrms operate have become
much tighter. In these circumstances, inefﬁciencies should disappear, and if this does not occur,
appropriate explanations should be explored. This paper does exactly that, by estimating cost efﬁ-
ciency scores and assessing whether they are biased by productive specialization. These questions
are not new, unlike the technique employed, which enables us to evaluate ﬁrms’ efﬁciencies by
comparing them only with those focusing on similar specializations, without the need to specify
separate frontiers for different output mixes. Results show that ﬁrms’ efﬁciency scores might be
downward or upward biased when compared with all other ﬁrms in the industry, instead of only with
those focusing on similar activities.
Key words: Banking, cost efﬁciency, kernel smoothing, nonparametric density estimation, transition
JEL Classiﬁcations: C14, C30, C61, G21, L5.
Over the last ﬁfteen years, there has been a remarkable concern about the com-
petitive viability of most Western European banking systems. Reasons for this
are manifold, but they can be found mainly in the possible effects that recent
developments in ﬁnancial markets have had on banks, including deregulation,
securitization, technological advances, internationalization, credit expansion, the
generally growing importance of ﬁnancial services in economic activity or the
unprecedented merger movement. In this reshaped ﬁnancial environment, it could
be assumed that the promoted increase in competition across the ﬁnancial industry
I would like to express my gratitude to Fundaci
on Caja Madrid, Fundaci
o Caixa Castell
(P1B98-21) and Generalitat Valenciana (GV99-135-2-08) for ﬁnancial support, and to the Instituto
Valenciano de Investigaciones Econ
omicas (IVIE), for kindly providing data. Two anonymous ref-
erees provided very valuable comments which substantially contributed to the improvement of the
original manuscript and must be also acknowledged. I also acknowledge, very especially, the help
and advice of Francisco P