Abstract
In this article we show—using the estimated cost efficiency of banks—that besides the risk (proxied by the share of non-performing loans), the quality of operational cost management was an equally important determinant of bank failure risk during the decade of banking sector transformation in the Czech Republic.
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Notes
An institution wholly owned by Konsolidační banka (Consolidation Bank). Konsolidační banka had the unique remit of managing non-performing loans. This bank was created in 1993 and was converted into Konsolidační Agentura (Consolidation Agency) at the start of 2001.
Since the period under analysis was characterized by bank mergers, failures, and entries, standardized treatment of these events was required. Bank mergers were treated as follows: from the year of occurrence of the merger onwards, the bank resulting from the merger was considered as a single joint-bank (i.e., the data for the banks in the merger were consolidated in the year of the merger). Banks that failed within a particular year were considered as not operating for the whole year. For periods where some quarters of data for a bank were missing, the bank was excluded from the sample.
By ignoring prices, technological efficiency (as in the nonparametric methods) limits the consideration to too little output or too much input.
The application of the fixed effects estimator is appropriate given our short data sample, since for large data samples the fixed effects estimator converges asymptotically to the random effects estimator.
While the Cobb–Douglas function would be too simple, the Fourier transformation would be unnecessarily complicated (see Bikker 2004).
Some studies include the factor share equations derived from Shepard’s lemma (Mester 1996). However, following Berger (1993), we are aware that including share equations would impose unnecessarily ex ante restriction of the allocative efficiency of the given input proportions. Nevertheless, Berger (1993) concludes that there are no significant differences between the results of estimates without share equations and those with share equations (the fully restricted specification).
We did not exclude non-performing loans, as their maintenance is costly, which might have consequences for measures of cost efficiency. For the purposes of studying the relationship between cost efficiency and failure, this approach to non-performing loans has been taken by the mainstream of the literature, for instance Wheelock and Wilson (2000).
Besides the usual industrial and commercial loans, real estate loans, and loans to individuals, total loans also comprise interbank market loans. This is motivated by the fact that in the Czech banking sector interbank loans represent a significant share of total bank loans. Loans to other banks and to the central bank accounted on average for 30% of total loans over 1994–2002. Moreover, as Dinger and von Hagen (2003) claim, the Czech banking sector operates as a two-tier system in which the interbank market is an important source of financing for small banks. In these conditions, excluding the interbank market would imply that cost efficiency would be systematically biased upward for the small banks.
Nominal data were deflated by the GDP deflator with the 1994 average as the base.
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This research was produced within the Czech National Bank’s research project framework. The opinions expressed in this article are those of the authors and are not necessarily endorsed by the Czech National Bank.
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Pruteanu-Podpiera, A., Podpiera, J. The Czech transition banking sector instability: the role of operational cost management. Econ Change Restruct 41, 209–219 (2008). https://doi.org/10.1007/s10644-008-9049-1
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DOI: https://doi.org/10.1007/s10644-008-9049-1