Work

Problem loans and cost efficiency in commercial banks

Year: 1997

Type: article

Abstract: This paper addresses a little examined intersection between the problem loan literature and the bank efficiency literature. We employ Granger-causality techniques to test four hypotheses regarding the relationships among loan quality, cost efficiency, and bank capital. The data suggest that problem loans precede reductions in measured cost efficiency; that measured cost efficiency precedes reductions in problem loans; and the reductions in capital at thinly capitalized banks precede increases in problem loans. Hence, cost efficiency may be an important indicator of future problem loans and problem banks. Our results are ambiguous concerning whether or not researchers should control for problem loans in efficiency estimation.

Source: Journal of Banking & Finance

DOI: 10.1016/s0378-4266(97)00003-4

Authors: Allen N. Berger, Robert DeYoung

Institutions: Federal Reserve, Federal Reserve Board of Governors, Office of the Comptroller of the Currency

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,340

Funder: U.S. Department of the Treasury