The sources of productivity change in Spanish banking

In this paper we examine the pattern of productivity change in Spanish banking over the period 1986–1993. Two sectors dominate Spanish banking, commercial banks and the faster-growing savings banks. We begin by examining productivity change separately within each sector. However, since the two sectors are gradually becoming more competitive, we continue by merging the two sectors, and by examining productivity change in the industry. The merging procedure follows a methodology originally proposed by Charnes et al., in which intra-sectoral managerial inefficiency is eliminated prior to merging. This procedure allows us to distinguish differences in managerial efficiency within each sector from differences in the institutional efficiency of the two sectors. It also enables us to decompose potential productivity change into institutional efficiency change, technical change, and the impact of scale economies. We find the commercial banks to have had a slightly lower rate of productivity growth, but a slightly higher rate of potential productivity growth. We attribute this phenomenon to differences in both managerial efficiency and institutional efficiency, to differences in the rate of technical progress, and to the adverse impact of diseconomies of scale in the commercial banking sector.