Keywords: Commercial banks, cost efficiency, loan quality, Granger causality.
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 that 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.
Full paper (103 KB PDF)
| Full paper (426 KB Postscript)
Home | Economic research and data | FR working papers | FEDS | 1997 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: July 16, 1997