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X-inefficiency, Moral Hazard, and Bank Failures

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  • Styrin Konstantin

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Abstract

Inefficient management is considered as a major factor responsible both for bank failures and X-inefficiency. Using data from financial statements of largest Russian banks for the period immediately preceeding the August 1998 crisis, we tested the hypothesis that the past level of X-inefficiency predicted the probability of failure of a financial institution after August 1998 financial crisis. Our probit/logit regressions suggest that X-inefficiency in the past does not help to predict bank failures, at least, in the August 1998episode. We obtained some indirect evidence that moral hazard from the part of bank owners was among the reasons why bank went bankrupt in the afteemath of August 1998 financial crisis in Russia. The captiveness, or affiliation of a bank with a financial-industrial group exagerrated the adverse effects on failure caused by primary factors such as a high level of foreign debt, the exposure to FX risk, etc. In some sense, more captive banks were more “willing” to fail ceteris paribus, which is consistent with the abundant anecdotal evidence about tunneling and asset stripping by “oligarch” banks in the aftermath of 1998 crisis.

Suggested Citation

  • Styrin Konstantin, 2005. "X-inefficiency, Moral Hazard, and Bank Failures," EERC Working Paper Series 01-258e-2, EERC Research Network, Russia and CIS.
  • Handle: RePEc:eer:wpalle:01-258e-2
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    Cited by:

    1. Zuzana Fungáčová & Laurent Weill, 2013. "Does competition influence bank failures?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(2), pages 301-322, April.
    2. Tara Deelchand & Carol Padgett, 2009. "The Relationship between Risk, Capital and Efficiency: Evidence from Japanese Cooperative Banks," ICMA Centre Discussion Papers in Finance icma-dp2009-12, Henley Business School, Reading University.
    3. Konstandina Natalia, 2006. "Probability of Bank Failure: The Russian Case," EERC Working Paper Series 06-01e, EERC Research Network, Russia and CIS.
    4. Fungáčová, Zuzana & Weill, Laurent, 2009. "How market power influences bank failures : Evidence from Russia," BOFIT Discussion Papers 12/2009, Bank of Finland, Institute for Economies in Transition.
    5. Sergey Drobyshevsky & Andrey Zubarev, 2011. "Sustainability of Russian Banks in 2007-2009," Research Paper Series, Gaidar Institute for Economic Policy, issue 155P.

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    Keywords

    Russia; Russian banks;

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