Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/19761
Authors: 
Koetter, Michael
Porath, Daniel
Year of Publication: 
2007
Series/Report no.: 
Discussion Paper, Series 2: Banking and Financial Supervision 2007,02
Abstract: 
Efficiency is considered a key factor when evaluating a bank's performance. Moreover, efficiency enhancement is an explicit policy objective in the Single Market Directive of the European Commission. But efficiency improvements may come at the expense of deteriorating bank profits and excessive risk-taking. Both the quantitative effects and dynamic reactions of performance in response to efficiency improvements remain often unclear on both theoretical and empirical grounds. We analyze the dynamic relations between efficiency and performance in the German banking market. To this end we use panel data for all German banks for the years from 1993 to 2004 and estimate impulse response functions (IRF) derived from a vector autoregressive model. The IRF estimate the response of a shock in efficiency on profits or default probabilities. The former is estimated with stochastic frontier analysis, the latter is estimated with a hazard rate model. The results indicate that a positive unit shift in efficiency reduces the probability of default and increases profits. On the one hand, we find evidence that the long-run impact of profit efficiency on risk is larger than for cost efficiency. However, cost efficiency impacts with a shorter time lag on the probability of default. On the other hand, cost efficiency has on average a slightly larger impact on profits than profit efficiency.
Subjects: 
Bank performance
efficiency
bank failure
vector autoregression
performance forecast
JEL: 
G33
D21
L25
G21
C33
C53
Document Type: 
Working Paper

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