Profit efficiency for Spanish savings banks

Frontier profit efficiency is examined for Spanish savings banks over 1986 and 1991, a period in which the Spanish banking industry has seen considerable deregulation. In Spain, the standard assumption that firms operate in a perfectly competitive output market is unlikely to be met. Thus we use an alternative profit function specification which allows for market power in the output market. Profit efficiency is determined using the thick frontier approach, and estimated using both alternative and standard profit function specifications to illustrate the effect of different assumptions regarding the competitiveness of the output market. Estimation of the alternative profit function suggests that the profit inefficiency of Spanish savings banks, which averaged 28%, fell by 40% between 1986 and 1991. The standard profit function, which we believe yields less reliable results, generated greater average inefficiency. There was no significant shift – up or down – in the profit frontier itself.