Cost efficiency in the euro area banking sector and the negative interest rate environment

This brief shows that euro area banks' cost efficiency, measured by a cost efficiency score inferred from an input-output analysis alongside the ratio of operating expenses over total assets, has improved somewhat in recent years. However, the analysis also indicates that there is still ample scope to achieve further efficiency gains. Banks most affected by the negative interest rate policy (NIRP), i.e. those relying mostly on retail deposits as a source of funding, strategically reacted to the negative effects of NIRP on their net interest margins by improving their cost efficiency. In particular, high-deposit banks that were larger, less profitable, with riskier loan portfolios, weaker pre-NIRP lending growth and that operated in more competitive banking sectors enhanced their cost efficiency more strongly after NIRP than their peers. This helped them to offset the impacts of negative interest rates on their profitability and, thus, supported their solvency and extension of credit. On the other hand, low-deposit banks recorded a decline in their cost efficiency after the introduction of the NIRP. Therefore, going forward, these latter banks will need to invest more effort in improving their efficiency.