Changes in the banking environment, particularly the increasing integration of the European Union (EU) financial markets, have accelerated bank consolidation in the EU over the past decade. The focus of the consolidation process has gradually shifted from domestic to cross-border merger and acquisition activities. Bank consolidation has decreased the number of banks, which has had key implications for the banking sectors.

Of late, the international banking industry has been undergoing far-reaching structural changes. The processes of liberalization, globalization and integration have dramatically changed the banking landscape around the world.In the European Union (EU), the Second Banking Directive of 1989 opened up the banking sectors of all EU member countries to other EU banks. The introduction of the Economic and Monetary Union in 1999 contributed to a large and transparent common banking sector. This has spurred the largest wave of Mergers and Acquisitions (M&As) so far. The banking sector consolidation accelerated in the early 1990s and peaked in 2000. It resulted in a reduction of the number of banks, and an increase in the average size of the bank and the concentration of the banking sector. The main factor driving the consolidation process has been value maximization, i.e., the expectation that the value of the new bank will exceed the sum of the individual values of banks to be merged.

Value maximization is generally achieved through gains in market power and efficiency (Berger et al ., 2000). Empirical evidence indicates that efficiency gains are realized through economies of scale, economies of scope and improvements in managerial efficiency, also known as X-efficiency. The literature on bank efficiency, for instance Berger, Hunter and Timme (1993), shows that the former two sources of efficiency gains are relatively small compared to potential gains in managerial efficiency.

At the beginning of transition, banking sectors in Central and Eastern European countries were in a gloomy condition with significantly lower efficiency compared to that in the EU. However, these countries embarked on the process of radical and profound restructuring of their banking sectors, in which bank consolidation played a key role. This resulted in significant improvements in the banking industry in Central and Eastern Europe, and increased its efficiency. In this respect, we address the question of the efficiency discrepancy between banks in the EU.

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