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Bad Luck or Bad Management? Emerging Banking Market Experience

Jiri Podpiera and Laurent Weill

Working Papers from Czech National Bank

Abstract: A large number of bank failures occurred in transition countries during the 1990s and at the beginning of the 2000s. These failures were related to increases in non-performing loans and deteriorated cost efficiency of banks. This paper addresses the question of the causality between non-performing loans and cost efficiency in order to examine whether either of these factors is the deep determinant of bank failures. We extend the Granger causality model developed by Berger and DeYoung (1997) by applying GMM dynamic panel estimators on a panel of Czech banks between 1994 and 2005. Our findings support the “bad management” hypothesis, according to which deteriorations in cost efficiency precede increases in non-performing loans, and reject the “bad luck” hypothesis, which predicts the reverse causality.

Keywords: Bank failures; cost efficiency; non-performing loans; transition countries. (search for similar items in EconPapers)
JEL-codes: D21 G21 G28 P20 (search for similar items in EconPapers)
Date: 2007-12
New Economics Papers: this item is included in nep-ban, nep-eff and nep-tra
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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