Risk in the EU Banking Industry and Efficiency under Quantile Analysis

This study estimates cost efficiency in the banking industry of 11 Central and Estern European countries over the period 1998-2005 under a quantile regression framework. Our purpose is to investigate for the first time in the literature whether cost efficiency in those banks differs across quantiles of the conditional distribution. We opt for the stochastic frontier analysis across wuantiles and employ the distribution-free approach. Results show that for higher conditional distributions, efficiency scores are lower. In a second stage analysis, we examine the impact of risk, measured by non-performing loans and loans loss provisions, on efficiency. The cross section analysis shows that risk asserts a negative impact on cost efficiency, especially in high order quantiles. Inaddition, the paper investigates the relationship between bank specific 'z' variables and cost efficiency across quantiles.