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Bank Efficiency and Default in Brazil: Causality Tests

Author

Listed:
  • Benjamin M. Tabak
  • Giovana L. Craveiro
  • Daniel O. Cajueiro

Abstract

Periods of Financial Stability are associated to low bank efficiency and high non-performing loans in credit portfolios. Therefore, this paper studies the relationship between bank efficiency and non-performing loans. To evaluate the bank efficiency, we employ a Data Envelopment Analysis. We employ the Arelano-Bond dynamic panel approach and a panel-VAR to test whether non-performing loans Granger cause bank efficiency (bad luck hypothesis) or whether bank efficiency affects loan quality (management with risk aversion). Empirical results for the Brazilian case corroborate the second hypothesis.

Suggested Citation

  • 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.
  • Handle: RePEc:bcb:wpaper:253
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    File URL: http://www.bcb.gov.br/pec/wps/ingl/wps253.pdf
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    References listed on IDEAS

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    1. Breuer, Janice Boucher, 2006. "Problem bank loans, conflicts of interest, and institutions," Journal of Financial Stability, Elsevier, pages 266-285.
    2. Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, pages 135-148.
    3. Fiordelisi, Franco & Marques-Ibanez, David & Molyneux, Phil, 2011. "Efficiency and risk in European banking," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1315-1326, May.
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    8. Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, pages 135-148.
    9. Staub, Roberta B. & da Silva e Souza, Geraldo & Tabak, Benjamin M., 2010. "Evolution of bank efficiency in Brazil: A DEA approach," European Journal of Operational Research, Elsevier, vol. 202(1), pages 204-213, April.
    10. Koutsomanoli-Filippaki, Anastasia & Mamatzakis, Emmanuel, 2009. "Performance and Merton-type default risk of listed banks in the EU: A panel VAR approach," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2050-2061, November.
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    12. Nier, Erlend W., 2005. "Bank stability and transparency," Journal of Financial Stability, Elsevier, pages 342-354.
    13. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    14. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    15. Williams, Jonathan, 2004. "Determining management behaviour in European banking," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2427-2460, October.
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    Cited by:

    1. Miguel Sarmiento & Jorge E. Galán, 2015. "The Influence of Risk-Taking on Bank Efficiency: Evidence from Colombia," BORRADORES DE ECONOMIA 013254, BANCO DE LA REPÚBLICA.
    2. Sarmiento, Miguel & Galán, Jorge E., 2014. "Heterogeneous effects of risk-taking on bank efficiency : a stochastic frontier model with random coefficients," DES - Working Papers. Statistics and Econometrics. WS ws142013, Universidad Carlos III de Madrid. Departamento de Estadística.
    3. Karminsky, A. & Kostrov, A., 2013. "Modeling the Default Probabilities of Russian Banks: Extended Abillities," Journal of the New Economic Association, New Economic Association, vol. 17(1), pages 64-86.

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