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Bad Luck or Bad Management? Emerging Banking Market Experience

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  • Jiri Podpiera
  • Laurent Weill

Abstract

A large number of bank failures occurred in transition countries during the 1990s and at the beginning of the 2000s. These failures 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 and DeYoung (1997) 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, and reject the "bad luck" hypothesis, which predicts the reverse causality.

Suggested Citation

  • Jiri Podpiera & Laurent Weill, 2007. "Bad Luck or Bad Management? Emerging Banking Market Experience," Working Papers 2007/5, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:wpaper:2007/5
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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