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

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Author Info
Anca Podpiera
Jiri Podpiera

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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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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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Related research
Keywords: Bank failure cost efficiency stochastic frontier hazard model.

Find related papers by JEL classification:
J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
J28 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Safety; Job Satisfaction; Related Public Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  1. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July. [Downloadable!] (restricted)
  2. Steven Fries & Damien Neven & Paul Seabright, 2002. "Bank Performance in Transition Economies," William Davidson Institute Working Papers Series 505, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  3. Nicos C. Kamberoglou & Elias Liapis & George T. Simigiannis & Panagiota Tzamourani, 2004. "Cost Efficiency in Greek Banking," Working Papers 09, Bank of Greece. [Downloadable!]
  4. Alexis Derviz & Jiri Podpiera, 2004. "Predicting Bank CAMELS and S&P Ratings: The Case of the Czech Republic," Working Papers 2004/01, Czech National Bank, Research Department. [Downloadable!]
    Other versions:
  5. Jonathan Williams & Edward Gardener, 2003. "The Efficiency of European Regional Banking," Regional Studies, Taylor and Francis Journals, vol. 37(4), pages 321-330, January. [Downloadable!] (restricted)
  6. Laurent Weill, 2003. "Banking efficiency in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 569-592, 09. [Downloadable!] (restricted)
  7. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  8. Jan Hanousek & Gerard Roland, 2001. "Banking Passivity and Regulatory Failure in Emerging Markets: Theory and Evidence from the Czech Republic," CERGE-EI Working Papers wp192, The Center for Economic Research and Graduate Education - Economic Institute, Prague. [Downloadable!]
    Other versions:
  9. Cole, Rebel A. & Gunther, Jeffery W., 1995. "Separating the likelihood and timing of bank failure," Journal of Banking & Finance, Elsevier, vol. 19(6), pages 1073-1089, September. [Downloadable!] (restricted)
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  10. Bauer, Paul W. & Hancock, Diana, 1993. "The efficiency of the Federal Reserve in providing check processing services," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 287-311, April. [Downloadable!] (restricted)
  11. David C. Wheelock & Paul W. Wilson, 1995. "Evaluating the efficiency of commercial banks: does our view of what banks do matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 39-52. [Downloadable!]
  12. Ferrier, Gary D. & Lovell, C. A. Knox, 1990. "Measuring cost efficiency in banking : Econometric and linear programming evidence," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 229-245. [Downloadable!] (restricted)
  13. Adnan Kasman, 2002. "Cost Efficiency, Scale Economies, and Technological Progress in Turkish Banking," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 2(1), pages 1-20. [Downloadable!]
  14. Richard S. Barr & Thomas F. Siems, 1994. "Predicting bank failure using DEA to quantify management quality," Financial Industry Studies Working Paper 94-1, Federal Reserve Bank of Dallas.
  15. Gary Whalen, 1991. "A proportional hazards model of bank failure: an examination of its usefulness as an early warning tool," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 21-31. [Downloadable!]
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  17. Bauer, Paul W. & Berger, Allen N. & Ferrier, Gary D. & Humphrey, David B., 1998. "Consistency Conditions for Regulatory Analysis of Financial Institutions: A Comparison of Frontier Efficiency Methods," Journal of Economics and Business, Elsevier, vol. 50(2), pages 85-114, March. [Downloadable!] (restricted)
    Other versions:
  18. Wheelock, David C & Wilson, Paul W, 1995. "Explaining Bank Failures: Deposit Insurance, Regulation, and Efficiency," The Review of Economics and Statistics, MIT Press, vol. 77(4), pages 689-700, November. [Downloadable!] (restricted)
    Other versions:
  19. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," Journal of Business, University of Chicago Press, vol. 74(1), pages 101-24, January. [Downloadable!] (restricted)
  20. Lynn D. Seballos & James B. Thomson, 1990. "Underlying causes of commercial bank failures in the 1980s," Economic Commentary, Federal Reserve Bank of Cleveland, issue Sep 1. [Downloadable!]
  21. Loretta J. Mester, 1992. "Efficiency in the savings and loan industry," Working Papers 92-14, Federal Reserve Bank of Philadelphia.
    Other versions:
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