This paper investigates the influence the environmental conditions have on the cost-efficiency of French and Spanish banking industries. We propose a new methodology for cross-country comparisons of efficiency using a parametric approach. In particular, the specific environmental conditions of each country play an important role in the definition and specification of the common frontier of different countries. Our results suggest that, without environmental variables, the cost-efficiency scores of Spanish banks are quite low compared to those of the French banks. However, when environmental variables are included in the model, the differences between both banking industries are reduced substantially. Overall, our results demonstrate that environmental variables contribute significantly to the difference in efficiency scores between the two countries.

We use a one-factor credit risk model to provide new estimates of stationary default probabilities and asset correlations in two large samples of French and German Small and Medium-sized Enterprises. Results show that, on average, SMEs are riskier than large businesses; and the asset correlations in the SME population are very weak (1–3% on average) and decrease with size. On average, the relationship between PDs and asset correlations is not negative, as assumed by Basel II, but positive, especially at the industry level, in the two countries. It is also possible to distinguish different segments inside the SMEs’ population: at least between very small and small SMEs and large SMEs.

This paper is devoted to the credit risk modeling issues of small commercial loans portfolios. We propose specific solutions dealing with the most important peculiarities of these portfolios: their large size and the limited information about the financial situation of borrowers. We then compute the probability density function of futures losses and VaR measures in a portfolio of 220.000 French SMEs. We also compute marginal risk contributions in order to discuss the loan pricing issue of small commercial loans and to compare the capital requirements derived from our model with those derived from the New Ratings-Based Basel Capital Accord.