Banking Efficiency Matters: Evidence from the COVID-19 Pandemic

42 Pages Posted: 11 Jan 2021 Last revised: 16 Apr 2021

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Yanhui Wu

Queensland University of Technology - School of Economics and Finance; Financial Research Network (FIRN)

Date Written: April 15, 2021

Abstract

Banking efficiency is an essential catalyst in reducing uncertainty during a crisis and stimulating post-crisis economic growth. The heterogeneity in pre-crisis banking efficiency explains the differences in uncertainty — measured using stock return volatility — across countries during the COVID-19 crisis. During the crisis, volatility is lower for countries with lower banking overhead costs and net interest margins than for their more inefficient counterparts. Effectual banking institutions are better equipped to supply the much-needed credit to the private sector during a crisis. We find that countries with pre-crisis efficient banking institutions are able to supply considerably more credit to corporations and households during the crisis. In addition, we show that countries with efficient banking institutions are associated with superior post-pandemic output growth based on economic forecasts. Our findings underscore the importance of better functioning banking systems in moderating some of the corporate losses and liquidity stresses during an unanticipated economic crisis.

Keywords: volatility, COVID, pandemic, financial development, financial institutions efficiency, banking efficiency, economic recovery

JEL Classification: G01, G21, G28

Suggested Citation

Dissanayake, Ruchith and Wu, Yanhui, Banking Efficiency Matters: Evidence from the COVID-19 Pandemic (April 15, 2021). Available at SSRN: https://ssrn.com/abstract=3759421 or http://dx.doi.org/10.2139/ssrn.3759421

Ruchith Dissanayake (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Yanhui Wu

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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