The Relationship between Bank Efficiency and Risk and Productivity Patterns in the Romanian Banking System

Using a data envelopment model and an input slack-based productivity index, we investigate commercial banks' cost efficiency and productivity patterns in the Romanian banking system over the period of 2005 to 2011. In a second stage, we assess the determinants of efficiency, emphasizing the relation between efficiency and risks. In the Romanian banking system, the relationship between concentration and efficiency supports Hicks’s ‘quiet life hypothesis’. With respect to the impact risk factors on efficiency, we find that a lower failure risk and a higher liquidity are positively associated with efficiency, while solvency risk is negatively associated with efficiency. We also find that banks with a higher return on equity and a higher level of financial intermediation are more efficient. An increase in the net interest margin leads to a decrease in efficiency, signaling a higher credit risk. The effects of the financial crisis on commercial banks in Romania were observable in 2008, when the cost efficiency and productivity decreased. Empirical results suggest that the contribution of the funds to the increase in productivity is the most significant, while that of labor and capital productivity is lower.