This article aims at investigating the efficiency of European and US commercial banks. Scale and scope economies indicators, as well as a measurement of X-efficiency are derived from three cost functions: Fourier flexible form, translog and Box-Cox. This allows checking the stability and the robustness of the evidence across the different specifications. Our results over the period 1995-98 show that overall the largest banks do not seem to have higher efficiency scores. Therefore, further enlargement of the production size does not necessarily lead to production gains.This article aims at analyzing the efficiency of European and US commercial banks over the period 1995-98. We employ here a broad definition of efficiency, which covers scale and scope economies, as well as cost efficiency.

The importance of such a work is in the provision of evidence as to whether significant variations in efficiency emerged after the consolidation process occurred within the United States during the 1980s, and if some gains could be derived by the restructuring process in the European banking industries. Regarding the European banking industry many factors have contributed to increase competition among financial institutions in the last few years. The first important factor is deregulation, promoted by the Second European Directive on Banking and Financial Services, which leads banks to compete not only in the domestic markets but potentially all over the world. Second, European Monetary Union affects the level of competition in the banking sector of countries adopting the Euro. Moreover, technological advances and deregulation have favored a process of despecialization, allowing banks to lend at any maturity, and reducing the differences among sectors.

Banks reacted to the increased European competition with an intense process of restructuring and growth leading the banking sector to experience an unprecedented level of consolidation through mergers and acquisitions operations among large financial institutions, very similar to that which occurred in the US banking industry in the 1980s. The consolidation process aims at reaping profitability, reducing cost inefficiency, increasing market power, and exploiting scale and scope economies, improving managerial efficiency.

Does Banking Consolidation Lead to Efficiency Gains? Evidence from Large Commercial Banks in Europe and US, Scale and scope economies, investments in information technology, human capital,global scale economies,higher information technology,more risk oriented structure,sophisticated financial products,financial market,Product specific economies.