IntroductionIn recent years, greate

Introduction
In recent years, greater competition in EU banking has been driven by technological change (TC), internationalisation and globalisation of financial services, higher demand for banking services and deregulation and privatisation of the industry (Casu et al., 2004; Maudos et al., 2002). These changes can be expected to have had an important impact on the business and management of European banks and particularly on the cost structure, revenues and their overall efficiency. The effect of these drivers of changes may be expected to have been particularly important in “non-core” EU countries such as Portugal and Spain, especially since, until the second half of the 1980s banks in these two countries were generally regarded as being uncompetitive relative to banks in neighbouring countries (Dutta and Doz, 1995; Vivas, 1997). Inefficiency has been popularly associated with overstaffing and an excess number of branches (Solsten and Meditz, 1990). However, with the opening of the banking industry to private investment, an increase in competition, the abolition of administrative interest rates and bank credit ceilings in the mid-1980s, and the European single market for financial services initiative, it is likely that the banking industry will have experienced some profound changes in performance over the last decade or so.
This paper investigates the performance of banks in Portugal and Spain during the period 1992-2003, and specifically looks at the extent to which efficiency has been influenced by portfolio orientation and scale of operation. It also examines how total factor productivity (TFP) in the two banking sectors has changed over these years and analyses whether the changes found have mainly been due to TC or whether there have been other contributory factors. Finally, the paper assesses differences in performance between banks that operate in the two countries to shed light on where inefficiencies are greatest. These results may have some implication for banks in other “non-core” EU countries, particularly those which have recently joined.
The paper is structured as follows. The next section discusses the existing literature on banking performance. This is followed by a description of the methodology used to assess performance in the banking sectors and an overview of the data. The next section discusses the empirical results, and the final section concludes by summarising the main findings and identifies some of the important implications for the future of banking business in the two countries. This section also provides suggestions for future research on bank performance