of technical efficiency: German co-operative banks should upgrade their managerial skills and
scale if they are to improve performance.
5. Discussion and Conclusion
An aggregate Luenberger productivity indicator is used to estimate and decompose
productivity growth on 11,816 observations of EU co-operative banks between 1996 and
2003. These data were used previously by Molyneux and Williams (2005) who employed
stochastic frontier analysis and Fourier flexible functional form methodologies, and the
productivity decomposition approach of Berger and Mester (2003) to estimate productivity
growth. The present set of results using an alternative productivity measure can confirm the
consistency of both methodological approaches.
There is productivity growth in the co-operative banking industry which is driven by
improvements in technological change. Even though it is positive, the rate of technological
change varies across countries. This finding is consistent with previous research on the co-
operative banking sector (see Molyneux and Williams, 2005) and the European banking
industry in general (see Casu et al, 2004). As in Casu et al (2004) and Williams (2001), we
observe evidence that banks in a limited number of markets are catching-up with European
best practice: in Portugal, Italy and Spain, technical efficiency change is as important as
technological change in driving productivity growth. Possible explanations for this feature of
the results include the establishment of a more competition environment (and ensuing banking
sector consolidation) brought about by the single market and other deregulatory acts.
Several policy implications arise from the results. First and foremost, it is clear that
there is considerable room for improving technical efficiency if co-operative banks are to
catch-up with industry best practice. Technical inefficiency is a consequence of one or more
of the following factors: (i) structural rigidities that create principal-agent problems (Jensen
and Meckling, 1976); (ii) rigidities associated with EU labour markets which give rise to
collective-action problems (Olson, 1965); (iii) organisational factors associated with X-
efficiency (Leibenstein, 1966); and (iv), dimensional factors associated with scale and scope
economies. Due to any, some or all of these factors, co-operative banks may produce at a
level below the maximum possible output, given the production environment. Arguably, some
of the above problems might be reduced by changing the ownership structure of co-operative
10