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Monitoring bank performance in the presence of risk

This paper proposes a managerial control tool that integrates risk in efficiency measures. Building on existing efficiency specifications, our proposal reflects the real banking technology and accurately models the relationship between desirable and undesirable outputs. Specifically, the undesirable output is defined as non-performing loans to capture credit risk, and is linked only to the relevant dimension of the output set. We empirically illustrate how our efficiency measure functions for managerial control purposes. The application considers a unique dataset of Costa Rican banks during 1998-2012. Results' implications are mostly discussed at bank-level, and their interpretations are enhanced by using accounting ratios. We also show the usefulness of our tool for corporate governance by examining performance changes around executive turnover. Our findings confirm that appointing CEOs from outside the bank is associated with significantly higher performance ex post executive turnover, thus suggesting the potential benefits of new organisational practices.

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File URL: https://econ-papers.upf.edu/papers/1310.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1310.

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Date of creation: Mar 2012
Date of revision: Jul 2014
Handle: RePEc:upf:upfgen:1310
Contact details of provider: Web page: http://www.econ.upf.edu/

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