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Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure

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  • Anca Podpiera
  • Jiri Podpiera

Abstract

While it is generally consented that management quality is often the key determinant of banks' success in a risky world, somewhat paradoxically early warning systems are mainly built on financial ratios driving management quality assessment to the periphery. In this paper we show, using estimated cost efficiency scores for the Czech banking sector, that cost inefficient management was a predictor of bank failures during the years of banking sector consolidation, and thus suggest the inclusion of cost efficiency in early warning systems.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2005/06.

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Date of creation: Dec 2005
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Handle: RePEc:cnb:wpaper:2005/06

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Keywords: Bank failure; cost efficiency; stochastic frontier; hazard model.;

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Citations

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Cited by:
  1. Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, vol. 4(2), pages 135-148, June.
  2. Anastasia Koutsomanoli-Filippaki & Emmanuel Mamatzakis, 2009. "Performance and Merton-Type Default Risk of Listed Banks in EU: a panel VAR approach," Discussion Paper Series 2009_09, Department of Economics, University of Macedonia, revised Apr 2009.
  3. Zuzana Irsova, 2010. "Bank Efficiency in Transitional Countries: Sensitivity to Stochastic Frontier Design," William Davidson Institute Working Papers Series wp998, William Davidson Institute at the University of Michigan.
  4. Elmas Yaldiz & Flavio Bazzana, 2010. "The effect of market power on bank risk taking in Turkey," Financial Theory and Practice, Institute of Public Finance, vol. 34(3), pages 297-314.
  5. Benjamin M. Tabak & Giovana L. Craveiro & Daniel O. Cajueiro, 2011. "Bank Efficiency and Default in Brazil: Causality Tests," Working Papers Series 253, Central Bank of Brazil, Research Department.

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