Bad luck or bad management? Emerging banking market experience
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.
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Volume (Year): 4 (2008)
Issue (Month): 2 (June)
Pages: 135-148
| Handle: | RePEc:eee:finsta:v:4:y:2008:i:2:p:135-148 |
| Contact details of provider: | Web page: http://www.elsevier.com/locate/jfstabil
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