Problem Loans and Cost Efficiency in Commercial Banks

WFIC 96-01

30 Pages Posted: 17 Jan 1996

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Robert DeYoung

University of Kansas School of Business

Date Written: November 1995

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 Classification: G21

Suggested Citation

Berger, Allen N. and DeYoung, Robert, Problem Loans and Cost Efficiency in Commercial Banks (November 1995). WFIC 96-01. Available at SSRN: https://ssrn.com/abstract=2277 or http://dx.doi.org/10.2139/ssrn.2277

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Robert DeYoung

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

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