Sustainability and Efficiency of the European Banking Market after the Global Crisis: The Impact of Some Strategic Choices

In the last few years, financial managers, supervisors and policy makers have been collectively engaged on the role of the banking and financial sector in relation to environmental and sustainability issues. The efficiency level that characterizes the production process of banks and financial intermediaries is strictly interconnected with sustainability so that, from a long term perspective, cost and profit efficiency reveals to be one of the most important premises for sustainability. This work aimed to analyze the level of efficiency achieved by European banking groups to verify if some key drivers of efficiency deriving from strategic choices outlined by literature on single banks (i.e., size, number of branches, cost income ratio and geographical location) are the same when considering banking groups. The study is focused on the period 2011–2016 that is characterized by, at least, two critical events that occurred after the sub-prime crisis. The level of efficiency of each banking group was measured with the Stochastic Frontier Approach and then the units were clustered into three homogeneous sets. Observing these clusters, the results show that the groups belonging to some specific countries appear to be more efficient with respect to others. Moreover, the banking groups characterized by many branches and a high level of cost income ratio exhibit a medium level of efficiency. Eventually, the biggest banking groups are the least efficient.


Introduction
In the last few years, financial managers and policy makers have been collectively engaged on the role of finance in relation to environmental and broader sustainability issues. Banking supervisors and regulators have also demonstrated growing awareness of the materiality of sustainability issues. The rapid growth of the green bonds market is a well-known example of the banking sector's engagement in sustainability issues. A growing amount of literature is nowadays focused on the relationship and the interconnectedness between banking and sustainability [1]. Recent literature [1] defines a sustainable bank as "a bank that not only understands and manages the risks that arise because of sustainability issues, but also perceives the strategic dimension of these issues". Addressing sustainability issues requires responsibilities and actions to be taken at all levels and across all the key functions of banks. More broadly, leading companies pursue sustainability because it has a material financial impact, since it contributes to generate revenues, cut costs and attract talents [2]. The same argument applies to banks too. In some ways, sustainability reveals to be a source of competitive advantage because banks involved in sustainability issues can improve their reputation and credibility, both outside and inside the organization, since they are able to increase motivation and retention, as employees react positively to the opportunity to weave environmental and social dimensions into their work. Otherwise, banks cannot remain position-less on this matter because the risk of inaction is twofold: first, they could lose business opportunities and financing options, and second they could face risks to reputation, credibility and image.
Sustainability is also an important topic for the risk management function within financial intermediaries, because identifying and quantifying environmental and social risks should be part of the normal process of risk assessment and management. Previous literature [3] shows that, while the identification and control of environmental and social issues in the core banking practices is becoming more common, the integration of sustainability criteria in lending and investment banking activities still requires significant improvement, if banks aim to protect the value of their assets in the short and longer term.
Then, the choices of bank managers have a strong relationship with the sustainability policies and, at the same time, sustainability issues can influence the management's behavior. Therefore, the efficiency level that characterizes the production process of banks and financial intermediaries is strictly interconnected with sustainability; from a long-term perspective, cost and profit efficiency reveals to be one of the most important premises for sustainability.
In the last decades, the Euro Area was involved in an important process of harmonization of the financial system, the combination of services offered by the financial intermediaries and the supervision rules. This phenomenon, combined with a high level of globalization, emphasized the problem of international competitiveness among intermediaries and, in particular, among banks. An important restructuring process involved the banking system to exploit economies of scale and scope.
Thus, the banking system is now characterized by the presence of multi-functional groups made up of many entities specialized in different activities; then, to evaluate the level of efficiency, it is essential to look at the group as a whole. By focusing on groups, rather than on banks, it is also possible to remove some distortionary effects caused by accounting policies and intra-group operations since these phenomena are netted out upon consolidation [4][5][6][7].
Even though it is better to look at banking groups instead of single banking units, there are few studies that analyze efficiency at the group level. In our opinion, this lack could also depend on the database construction, which is quite tricky, because it needs continuous revisions due, for example, to the numerous merger and acquisition (M&A) processes that characterize the banking sector.
This work contributes to fill the gap of the lack of works dealing with groups and tries to verify if some key drivers of efficiency deriving from strategic choices outlined by the literature on single banks (i.e., size, number of branches, cost income ratio and geographical location) still have the same relevance when considering banking groups. Moreover, the answer to the previous question was obtained through a delicate database construction, merging different types of information (accounting and ownership aspects).
For this aim, this work starts comparing the level of efficiency of the most important banking groups of the Euro Area during 2011-2016 through the implementation of the Stochastic Frontier Approach. We decided to focus on this period to analyze the banking system reaction to three different events as outlined in the Bank for International Settlements annual reports: the consequences of the sub-prime crisis (early 2011), the sovereign debt crisis (second part of 2011 and 2012) and the explosion of the non-performing loans (2014-2016).
The element of innovation is attributable to the fact that we analyzed Euro Area banking groups in a period marked by a sequence of critical events and in a context characterized not only by a general increase in risks and competitiveness, but also by a strong commitment with sustainability issues.
This analysis is useful to point out the recent development of the European banking sector; the results should be quite interesting for different categories of stakeholders, such as managers, shareholders and regulatory authorities, since they reveal the relative importance of the key factors that drive the banking business and their impact on the overall business.
The paper is organized as follows. In Section 2, there is a review of the previous literature about bank efficiency measurement. Section 3 is a summary of the methodology implemented in this work. Section 4 illustrates the results of the empirical analysis. Section 5 is a discussion of the obtained results.

Literature Review
The issue of X-efficiency was introduced for the first time by Farrell [8] who defined inefficiency as the distance of a firm from the so-called frontier that is the benchmark able to represent the optimal production or cost function. During the 1990s, this concept, together with the concept of productivity, was extended to the studies dealing with financial intermediaries (for a literature review about the efficiency of financial intermediaries different from banks, see [9,10]). Then, the literature divided into two main strands: (1) the works dealing with methodological issues such as the shape of the production/cost frontier, the choice between parametric and non-parametric approaches [11][12][13][14][15][16][17]; and (2) studies focused on empirical issues related to efficiency. Among these works, some studies focused on the relationship between efficiency and some environmental variables or managerial variables. The main contributions studied the banking system in France [18], Germany [19], Italy [20][21][22][23][24], Spain [25], Greek [16], United Kingdom [26], America [12,[27][28][29][30][31][32], Australia [33], China [34] and Japan [35,36]. Other studies tried to compare the banking system of different countries [37][38][39][40][41][42][43][44]. In particular, this branch of research grew as a consequence of the internationalization process and gave birth to different techniques of comparison; the first is based on the implementation of different stochastic frontiers, one for each country involved in the analysis [45][46][47], and the second is based on a single frontier for all the units regardless from the country [48][49][50][51][52][53][54].
The evolution of the supervision scheme issued by the Basel Committee and the introduction of the Single Supervisory Mechanism in the Euro Area pushed up a new branch of research that studied the relationship among efficiency, supervisory models and degree of independence of the Central Authority [55][56][57][58]. Similarly, with the introduction of new rules dealing with risk and corporate governance, other works focused on the impact of risk management on efficiency. The main topics analyzed concern the link between efficiency and asset quality [25,27,59,60], the evaluation of credit risk weighted efficiency scores [27,48,[61][62][63][64] and the relationship between efficiency and default risk [24,[65][66][67].
As stated before, we found only few works dealing with the relationship between efficiency and the business model, the strategic choices and the complexity of the banking groups. This could also be due to the reasons mentioned above. Some authors studied the level of efficiency of banking groups' holdings [68,69], other works focused on the structure of the distribution network [70] and only one author compared cost and profit efficiency of financial intermediaries belonging to conglomerates with the same measures referred to universal banks [71]. Three other works analyzed efficiency and productivity of Italian financial conglomerates [72,73] or Luxembourgian conglomerates [74].
Our paper tries to fill this gap with a comparative analysis about the efficiency level of European banking groups in the period 2011-2016.

Methodology
The discussion about the different methodologies that can be adopted to measure the efficiency level and about the best choices that could be done in terms of inputs and outputs of the banks and financial intermediaries production process have been much debated over time so that there is a huge amount of literature about these topics [8,10,13,14,52,70,[75][76][77][78][79][80][81][82][83].
Although we deeply analyzed these issues in previous works [9,10], this paper lies outside the analysis of these particular topics from a theoretical and methodological point of view. Thus, we decided to adopt the most common and widely used approaches of the mentioned literature on empirical research to measure the efficiency level and to define/identify what must be meant by inputs and output for banks.
With more detail, to evaluate the level of efficiency of the European banking groups, a parametric approach was employed since it is considered more flexible and more easily adaptable to data. These approaches are very popular then there is the possibility to compare our results with previous literature. In particular, we chose the Stochastic Frontier Approach [79][80][81][82][83][84] because it can distinguish the component of efficiency due to random factors, measurement errors or different financial reporting standards, from the component which represents the ability of the manager. This result is achieved by structuring in a particular way the error term which results from the sum of two components: It represents the distance of the output (in the case of production function) or the cost (in the case of cost function) of the k-th unit from the frontier. This distance is the sum of the two above mentioned components: the random element (v k ) and the level of technical inefficiency (u k ). The first term is symmetrical and it is distributed as a normal random variable v ∼ N 0; σ 2 v . The second term is positive in case of production function and negative in case of cost function and it follows a one side normal distribution (N + 0; σ 2 u ). In addition, v and u are independent such that cov(v k , u k ) = 0, ∀k. In this work, banking groups were compared based on their cost efficiency so the difference between the total cost of each unit and the total cost of the best practice group to produce the same quantity of output under the same conditions will be measured.
To define outputs and inputs, the Intermediation Approach [83,85] was adopted introducing three output variables (loans, securities and off-balance sheet items) and four inputs (human capital, liabilities, fixed assets and the amount of equity) [62,63]. Table 1 illustrates the proxies that were used for inputs and outputs. To define the algebraic formulation of the cost frontier, which represents the technology used by each unit to transform inputs into outputs, there are different possibilities: previous literature offers many formulas that differ in terms of flexibility and ability to represent different production technologies and to respect some fundamental properties [86,87]. Among the best known, there are the Cobb-Douglas, the Constant Elasticity of Substitution (CES), and the Trans-logarithmic (Transcendental Logarithmic or translog). The first two functions are not very common in the recent literature because of their low flexibility, so the translog function was employed to have the possibility to compare the obtained results with the most recent studies. This function is characterized by convex cost curves and variable elasticity of production and substitution between different inputs. Our trans-logarithmic function will appear as follows: where TC represents the total production cost of each banking group during each year in the observed period; Q i (with i = 1, . . . , m) represents output quantities for each unit in each year; and Fj (with j = 1, . . . n) are inputs employed by each group in each year. α, β, ρ, δ, and γ are the parameters to be estimated. In this work, three outputs (i = 1, 2, 3) and four input factors (j = 1, 2, 3, 4) were considered, as shown in Table 1.
To calculate the efficiency values for each banking group for each year, the values of the variables were deflated (to improve the comparison between groups belonging to different countries) and then standardized (to avoid any problem related to scale) by means of the usual transformation into z-scores.
The geographical and dimensional distribution of the groups is presented as well as some descriptive statistics of the main variables employed in the study. Then, the evolution of the efficiency scores for the whole set of banking groups and for the banking groups split with respect to country and group size, and the trend of the average efficiency score of the banking groups in the period 2011-2016 with respect to the country and to the size of each group are illustrated.
In relation to the size, the classification was assessed with a two steps procedure. First, the importance of each single banking group within the whole Euro Area was measured by means of a ratio between the total assets of the observed unit and the total asset of the European Banking system. Secondly, based on this value, the importance of each group within the set under analysis was evaluated: groups that show an importance greater than 1% were considered large, groups with an importance lower than 0.1% were considered small and all the other were considered in the mids.
To provide a complete representation of the dynamics of efficiency during the observed period, in compliance with the degree of asymmetry of the annual distributions of the efficiency scores and with the yearly observations number, in relation to each year, the banking groups were divided into classes according to the efficiency degree reached. Each class will be labeled using a numeric value.
Then, both a classification coincidence and a co-graduation analysis of the vectors of these new values for each year were done to highlight whether the banking groups had an up-grade in performance, in terms of efficiency, during time.
Finally, a cluster analysis of banking groups based on the efficiency levels reached during the whole period was performed to verify if some key drivers of efficiency deriving from strategic choices and/or business model outlined by literature on single banks (i.e., size, number of branches, cost income ratio and geographical location) are the same when considering banking groups.

Data and Results
The set of European banking groups involved in our work is made up of 70 units. They represent the whole set of active banking groups in the Euro Area with the exception of Cyprus, Sweden, Finland, Greece, Ireland, Lithuania, Luxemburg, Latvia, Malta, Slovenia, and Serbia. For comparability reasons, we decided to work on a balanced data set, so we dropped those banking groups for which the variables involved in this study had missing values in the observed period.
All data came from Orbis Bank Focus (Bureau Van Dijk) except for the GDP deflators that were extracted from the World Bank Database.
The efficiency values for each banking group for each year were evaluated via STATA 14. Table 2 illustrates the geographical and dimensional distribution of the groups, while Table 3 shows some descriptive statistics of the main variables employed in this study. Both tables are referred to the latest information.   Table 4 shows the evolution of the efficiency scores for the whole set of banking groups and the change in the mean value of efficiency from 2011 to 2016. Tables A1 and A2 split the same information with respect to country and group size.     Figure 2, small groups exhibit a smaller lack of efficiency during the last two years, while large groups seem to suffer much more than others. This is probably a consequence of the high level of complexity of a large group where the reaction to external changes is slow. Otherwise, the overall path confirms our initial hypothesis and it is the consequence of the events that affected the European banking system during the period considered. In particular, the decline recorded in 2012 could be traced back to the effects of the sovereign debt crisis and the sudden widening of the spread in the main continental countries. On the contrary, the two-year period that followed is characterized by a slight recovery due to the overcoming of the debt crisis and the sub-prime crisis generally speaking. On the other hand, the last two years exhibit a strong discontinuity compared to the previous period; this fact is the consequence of the well-known problem of non-performing loans. During these years, the Supervisory Authority went into a deep monitoring of the health of the credit portfolio held by financial institutions (see, for   Figure 2, small groups exhibit a smaller lack of efficiency during the last two years, while large groups seem to suffer much more than others. This is probably a consequence of the high level of complexity of a large group where the reaction to external changes is slow. Otherwise, the overall path confirms our initial hypothesis and it is the consequence of the events that affected the European banking system during the period considered. In particular, the decline recorded in 2012 could be traced back to the effects of the sovereign debt crisis and the sudden widening of the spread in the main continental countries. On the contrary, the two-year period that followed is characterized by a slight recovery due to the overcoming of the debt crisis and the sub-prime crisis generally speaking. On the other hand, the last two years exhibit a strong discontinuity compared to the previous period; this fact is the consequence of the well-known problem of non-performing loans. During these years, the Supervisory Authority went into a deep monitoring of the health of the credit portfolio held by financial institutions (see, for  Figure 2, small groups exhibit a smaller lack of efficiency during the last two years, while large groups seem to suffer much more than others. This is probably a consequence of the high level of complexity of a large group where the reaction to external changes is slow. Otherwise, the overall path confirms our initial hypothesis and it is the consequence of the events that affected the European banking system during the period considered. In particular, the decline recorded in 2012 could be traced back to the effects of the sovereign debt crisis and the sudden widening of the spread in the main continental countries. On the contrary, the two-year period that followed is characterized by a slight recovery due to the overcoming of the debt crisis and the sub-prime crisis generally speaking. On the other hand, the last two years exhibit a strong discontinuity compared to the previous period; this fact is the consequence of the well-known problem of non-performing loans. During these years, the Supervisory Authority went into a deep monitoring of the health of the credit portfolio held by financial institutions (see, for example, the Asset Quality Review Process that started in November 2013) and forced the banks with a high percentage of non-performing loans to sell those assets. Consequently, these kind of loans generated significant impairments with immediate fallouts on the income statements.
Based on efficiency scores year by year obtained, since the distribution of these scores was quite symmetrical in each year (data are available on request) and considering the number of observations, banking groups were divided into three classes. The partition was done according to the following criteria:

•
The first class extends from the minimum value to the score equal to the mean minus the standard deviation. This was encoded with 3 and represents low efficiency groups.

•
The second class includes the groups whose score was in between the mean value minus the standard deviation and the mean value plus the standard deviation. This was encoded with 2.

•
The third class includes groups with efficiency scores greater than the mean plus the standard deviation. This was encoded with 1 and represents the best groups in terms of efficiency.
To analyze the degree of persistency of efficiency scores, we observed the correspondence of the rankings for each year and their level of co-graduation (by means of the Spearman coefficient) [10]. Our results show that, on average, the banking groups changed their classification during the observed period. The mean of the coincidence percentages is equal to 71%, while the mean of the Spearman co-graduation indexes for different years is only 49%. In particular, further examinations revealed that, despite the reduction in the overall level of efficiency from 2011 to 2016, on average, 84% of the groups showed an upgrade with an improvement rate of approximately 73%.
Considering the efficiency scores of each group for each year, we implemented a cluster analysis over the entire period to divide the banking groups into homogeneous sets. All the input variables employed in the cluster analysis revealed to be significant. To be sure of the robustness of the classification, we tried different methods. We employed both a k-medium algorithm (which organizes the groups into disjoint subsets so that each cluster is associated with a centroid and each banking group is assigned to the cluster whose centroid is closer) and various hierarchical methods, which organize the units on a tree (dendrogram) built based on a matrix of similarities/distances between the objects obtained according to a particular criterion.
The dendrogram analysis, as well as some related tests, highlighted as the best banking groups partition the subdivision in three clusters, respectively, characterized by high, mid or low level of efficiency. The results of the cluster analysis are shown in Table A3.

Discussion and Conclusions
Sustainability is a relatively new topic in the banking business, but it is gaining more and more attention from managers, stakeholders and regulators. The concept of sustainability is strongly linked to that of efficiency since they can influence each other being both depending on the strategic choices of the manager.
Given this relationship, we decided to go into a deeper examination of the dynamics of cost efficiency of European banking groups during the period 2011-2016 to verify if some key drivers of efficiency deriving from strategic choices outlined by literature on single banks (i.e., size, number of branches, cost income ratio and geographical location) are the same when considering banking groups.
Thus, this paper differs from previous contributes of the literature in the following ways: (i). It focuses on the whole group as an entity instead of individual banks (thus, it is possible to remove some distortionary effects caused by accounting policies and intra-group operations since these phenomena are netted out upon consolidation).
(ii). It considers an extended period after the sub-prime crisis in which other dramatic events (among others, the sovereign debt crisis and the explosion of the amount of non-performing loans (NPL) in bank portfolios) took place in a context characterized not only by a general increase in risks and competitiveness, but also by a strong commitment with sustainability issues.
Even though it should be better to look at banking groups instead of single banking units for the reason mentioned above, few studies analyze efficiency at the group level. Thus, the analysis in the paper, that is useful to point out the recent development of the banking sector in Europe, also tries to fill this gap in literature.
The obtained results should be quite interesting for different categories of stakeholders, such as managers, shareholders and regulatory authorities, since they reveal the relative importance of the key factors that drive the European banking market and their impact on the overall business.
The results achieved (in line with previous literature [43,47,88]) highlight the impact of the mentioned dramatic events. In particular, the year 2012 is marked by a sudden decrease of the mean efficiency level because of the impact of the sovereign debt crisis on the most of continental Europe. The following period is instead characterized by a recovery followed by another collapse due to the consequences of the NPL explosion in bank portfolios.
In line with other studies [39,88], the banking groups that exhibited the highest efficiency values during 2011-2016 (such as the banking groups belonging to Cluster 1 in Table A3) are largely Italian and French institutions (37% and 26% of the cluster, respectively). The same groups reveal the less dramatic lack of efficiency too. On the contrary, the groups that suffered the most during the whole period were those operating in Germany and Spain.
Even though this result may seem surprising, it is useful to consider some facts to understand the reasons behind these data. In the case of Italy, for example, it is known that, during the Sovereign Debt Crisis, the financial system suffered for a strong speculative attack that caused a dramatic widening of the spread on Government Bonds. The whole system recovered in a few weeks thanks to the banks that proved to be really robust: they were able to use their liquidity reserves (and additional liquidity from the Central Bank) to buy a huge amount of Treasury Bonds thus stopping their price fall and letting the spread to reduce to the previous level. Another remark that is useful to explain the results referred to the last part of the observed period, when the explosion of NPLs seriously damaged the balance sheets of many banks, is referred to the problem of the evaluation of Risk Weighted Assets. As stated by some researchers and some institutions [89,90], most of the banks of southern Europe adopted the Standardized Approach to evaluate their Risk Weighted Assets (RWA) for capital ratios purposes. On the other hand, in the northern part of Europe, the opposite situation was observed, since many banks adopted Internal Rating Based (IRB) methods. Now, it is well known that the two approaches produce different results even if applied to the same entities and, in particular, the risk weighted assets coming from IRBs are lower. This means that, even if the capital ratios of southern Europe banks may seem lower, they do not reflect a real riskier situation; it is only an algebraic result, which is why Italian and French banks revealed better results than expected. Finally, many statistics about NPLs employed in international comparisons are based on the value of gross loans. In the case of Italy, a deeper look into the banking accounts reveal that the high level of NPLs is counterbalanced by a likewise high level of provisions so that the coverage ratio of these banks' loans is higher than the European average [77]. These observations might be able to explain the high level of efficiency of Italian and French banks in this work.
The banking groups that exhibited mean efficiency (i.e., the banking groups belonging to Cluster 2 in Table A3) are characterized by a very high number of branches-that is, a high level of complexity-and high values of cost income ratio. These items are probably connected because a big organization often reveals to be expensive because of its complexity [10].
Finally, the banking groups of the third cluster in Table A3 (low efficient groups) are the biggest in terms of size (measured by total assets). Moreover, our data show that large groups suffered the worst decrease in terms of efficiency, while small groups revealed to be more virtuous. This result is in line with previous literature [17] that pointed out as larger banks were more severely hit by the global financial crisis.
A further improvement of this work would consider the variables that revealed a positive or negative impact on the efficiency score. In particular, we would like to analyze whether the most efficient banking groups are actually characterized by a strategy and by a business model that aim to reach appropriate levels of liquidity and lending activity. This is extremely important because, on a low level, they represent an opportunity cost, while, on the contrary, if too high, they should turn into a remarkable source of risk or into an adverse selection problem.

Conflicts of Interest:
The authors declare no conflict of interest.