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Problem Loans and Cost Efficiency in Commercial Banks
Allen N. Berger University of South Carolina - Moore School of Business Robert DeYoung University of Kansas School of Business November 1995 WFIC 96-01 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 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 include loan quality in efficiency estimation.
JEL Classifications: G21 Working Paper SeriesDate posted: January 17, 1996 ; Last revised: July 18, 1997Suggested CitationContact Information
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