Decomposing global bank productivity growth: the role of non-performing loans, equity and technology

We propose a flexible functional form for estimating production performance that allows for endogeneity of the underlying inputs and outputs. The proposed model opts for a novel local likelihood estimation method that adequately deals with issues of endogeneity, whilst accounts for non-parametric heteroskedasticity in the covariance matrix of the error term. We argue that bank productivity as provided by our model based on bank micro-foundations is better suited to measure bank performance compared to efficiency. In the empirical section, we show the destructive effect of nonperforming loans on bank-specific TFP growth in advanced, emerging and developing economies. Technology, though, appears to positively contribute to bank TFP growth across the world. Furthermore, we show that bank risk-taking and raising capital by equity are negatively related to TFP growth, while liquidity has a positive impact.