Introduction
Efficiency at the level of the enterprise is a major issue in contemporary European
economics, due to the ever more intense pressure that competition exerts on prices. This
competitive pressure results in two stages of evolution: first, the deregulation of former
national markets improves competition between domestic enterprises; secondly, the adoption
of the EU’s Single Market Programme (SMP) improves competition between domestic and
foreign firms. Over the last decade or so, a growing literature, using a variety of approaches,
has emerged dealing with the issue of productivity in banking.1 Generally speaking, the
European evidence suggests banks achieved productivity growth during the 1990s although
the rate of growth differs across countries. Casu et al (2004) report productivity growth in the
Italian and Spanish commercial banking sectors which they attribute to an extensive
consolidation process, whereas mixed results are reported for French and German banks.
Williams (2001) attributes productivity growth in the European savings banks sector to
financial deregulation. Kumbhakar et al (2001) and Dietsch and Weill (2000) find evidence of
the impact of technical progress upon productivity growth in the Spanish savings banks
sector, and European commercial, mutual and savings banks sectors, respectively. In contrast,
the US literature (see Bauer et al, 1993; Humphrey and Pulley, 1997; Stiroh, 2000; Alam,
2001; and Berger and Mester, 2003) find limited evidence of productivity growth.
This paper aims to extend the established literature on banking sector productivity by
applying the Luenberger indicator (Chambers, 1996) to estimate and decompose productivity
change. Earlier studies of bank productivity tend to employ nonparametric techniques and
Malmquist productivity indexes. The Luenberger indicator is a difference-based index of
directional distance functions whereas the Malmquist index is a ratio-based measure of the
Luenberger.2,3 Luenberger (1992) introduces the shortage function which has the desirable
properties of accounting for both input contractions and output improvements, and
establishing duality between the shortage function and the profit function (Chambers et al,
1998). Thus, the indicator can accommodate either an input or output perspective
corresponding to cost minimization or profit maximization. We employ the Luenberger
productivity indicator of Chambers (1996) to estimate productivity change and its constituents
1 See the reviews by Berger and Humphrey (1997) and Casu et al, (2004).
2 Productivity measures based on differences are termed “indicators” whilst measures based on ratios are termed
“indexes”. Chambers (1996, 2002) and Diewert (1998, 2000) discuss the two approaches.
3 The theoretical and empirical relationships between the Luenberger indicator and Malmquist productivity index
are discussed by Boussemart et al (2003).