Deteriorating Cost Efficiency in a Bank Signals the Risk of Failure

Anca Pruteanu-Podpiera and Jiri Podpiera

Chapter Thematic Article 4 in CNB Financial Stability Report 2005, 2006, pp 102-105 from Czech National Bank, Research and Statistics Department

Abstract: The banking sector is a dominant component of the financial system in the Czech Republic. The stability of the banking system is of key importance as regards the financial stability of the economy as a whole. Any turbulence in the banking system can, moreover, generate a need for additional fiscal expenses in this area. For these reasons it is important to analyse banking sector developments in more detail and to attempt to enhance the early warning system toolkit – bank ratings, in order to prevent bank failures more effectively. This article sets out to describe a potentially usable concept of cost efficiency for more objective measurement of banks' management quality and demonstrates that this indicator is a good indicator of bank failure.

Date: 2006
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