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Bad luck or bad management? emerging banking market experience

  • Jirí Podpiera
  • Laurent Weill

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.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/14305.

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Date of creation: 2008
Date of revision:
Publication status: Published in: Journal of Financial Stability (2008) v.4,p.135-148
Handle: RePEc:ulb:ulbeco:2013/14305
Contact details of provider: Postal: CP135, 50, avenue F.D. Roosevelt, 1050 Bruxelles
Web page: http://difusion.ulb.ac.be

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  1. Allen N. Berger & Robert DeYoung, 1995. "Problem Loans and Cost Efficiency in Commercial Banks," Center for Financial Institutions Working Papers 96-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  2. Allen Berger & John Leusner & John Mingo, 1994. "The Efficiency of Bank Branches," Center for Financial Institutions Working Papers 94-27, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. David C. Wheelock & Paul W. Wilson, 1995. "Evaluating the efficiency of commercial banks: does our view of what banks do matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 39-52.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Bonin, John P. & Hasan, Iftekhar & Wachtel, Paul, 2004. "Bank performance, efficiency and ownership in transitition countries," BOFIT Discussion Papers 7/2004, Bank of Finland, Institute for Economies in Transition.
  6. Anca Podpiera & Jiri Podpiera, 2005. "Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure," Working Papers 2005/06, Czech National Bank, Research Department.
  7. Laurent Weill, 2003. "Banking efficiency in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(3), pages 569-592, 09.
  8. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  9. Williams, Jonathan, 2004. "Determining management behaviour in European banking," Journal of Banking & Finance, Elsevier, vol. 28(10), pages 2427-2460, October.
  10. Richard S. BARR & Lawrence M. SEIFORD & Thomas F. SIEMS, 1994. "Forecasting Bank Failure : A Non-Parametric Frontier Estimation Approach," Discussion Papers (REL - Recherches Economiques de Louvain) 1994041, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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