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Bad luck or bad management? Emerging banking market experience

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  • Podpiera, Jiri
  • Weill, Laurent

Abstract

A large number of bank failures occurred in transition countries during the 1990s and at the beginning of the 2000s. These 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, A., DeYoung, R., 1997. Problem loans and cost efficiency in commercial banks. J. Banking Finance 21, 849-870] 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. Banking supervisors should consequently focus on enhanced cost efficiency of banks in order to reduce the likelihood of bank failures in transition countries.

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  • Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, vol. 4(2), pages 135-148, June.
    • Handle: RePEc:eee:finsta:v:4:y:2008:i:2:p:135-148
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    References listed on IDEAS

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    9. Anca Podpiera & Jiri Podpiera, 2005. "Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure," Working Papers 2005/06, Czech National Bank.
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    More about this item

    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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