Journal of Financial Stability Vol. 4 No. 2 2008
Bad luck or bad management? Emerging banking market experience
Abstract
A large number of bank failures occurred in transition countries during the 1990s and at the beginning of the 2000s. These were related to increases in non-performing loans and deteriorated cost efficiency of banks. This paper addresses the question of the causality between non-performing loans and cost efficiency in order to examine whether either of these factors is the deep determinant of bank failures. We extend the Granger-causality model developed by [Berger, A., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. J. Banking Finance 21, 849–870] by applying GMM dynamic panel estimators on a panel of Czech banks between 1994 and 2005. Our findings support the bad management hypothesis, according to which deteriorations in cost efficiency precede increases in non-performing loans. Banking supervisors should consequently focus on enhanced cost efficiency of banks in order to reduce the likelihood of bank failures in transition countries.
- DOI
- 10.1016/j.jfs.2008.01.005
- Volume
- 4
- Issue
- 2
- Pages
- 135-148
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref