Does Efficiency Help Banks Survive and Thrive during Financial Crises?

Abstract

We examine how bank efficiency during normal times affects survival, risk, and profitability during subsequent financial crises using data from five U.S. financial crises and preceding normal times. We find cost efficiency during normal times helps reduce bank failure probabilities, decrease risk, and enhance profitability during subsequent financial crises, while profit efficiency has limited benefits. Results suggest that cost efficiency better measures management quality, while profit efficiency may partially reflect temporary high returns from risky investments during normal times. Findings imply policymakers, regulators, supervisors, and managers may focus on cost efficiency during normal times to promote better financial crisis performance.

Keywords: Banking, Efficiency, Financial Crises, Performance, Survival, Risk, Profitability

JEL Classification: G18, G21, G28