Monitoring Bank Performance in the Presence of Risk

Journal of Productivity Analysis 44(3), 265–281 (2015)

31 Pages Posted: 2 Sep 2014 Last revised: 9 Jun 2016

See all articles by Mircea Epure

Mircea Epure

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Esteban Lafuente

Universitat Politecnica de Catalunya (UPC Barcelona Tech)

Date Written: July 1, 2014

Abstract

This paper proposes a managerial control tool that integrates risk in efficiency measures. Building on existing efficiency specifications, our proposal reflects the real banking technology and accurately models the relationship between desirable and undesirable outputs. Specifically, the undesirable output is defined as non-performing loans to capture credit risk, and is linked only to the relevant dimension of the output set. We empirically illustrate how our efficiency measure functions for managerial control purposes. The application considers a unique dataset of Costa Rican banks during 1998-2012. Results’ implications are mostly discussed at bank-level, and their interpretations are enhanced by using accounting ratios. We also show the usefulness of our tool for corporate governance by examining performance changes around executive turnover. Our findings confirm that appointing CEOs from outside the bank is associated with significantly higher performance ex post executive turnover, thus suggesting the potential benefits of new organisational practices.

Keywords: efficiency, risk, accounting, CEO turnover, banking, non-performing loans

JEL Classification: G21, G28, G3, M1, M2

Suggested Citation

Epure, Mircea and Lafuente, Esteban, Monitoring Bank Performance in the Presence of Risk (July 1, 2014). Journal of Productivity Analysis 44(3), 265–281 (2015). Available at SSRN: https://ssrn.com/abstract=2489758 or http://dx.doi.org/10.2139/ssrn.2489758

Mircea Epure

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://mirceaepure.com

Barcelona Graduate School of Economics (Barcelona GSE)

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Esteban Lafuente (Contact Author)

Universitat Politecnica de Catalunya (UPC Barcelona Tech) ( email )

Barcelona, Barcelona
Spain

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