Deteriorating cost efficiency in commercial banks signals an increasing risk of failure

Anca Podpiera, Jiří Podpiera

While it is generally consented that management quality is often the key determinant of banks' success in a risky world, somewhat paradoxically early warning systems are mainly built on financial ratios driving management quality assessment to the periphery. In this paper we show, using estimated cost efficiency scores for the Czech banking sector, that cost inefficient management was a predictor of bank failures during the years of banking sector consolidation, and thus suggest the inclusion of cost efficiency in early warning systems.

Keywords: Bank failure, cost efficiency, stochastic frontier, hazard model

Issued: December 2005

Published as: Pruteanu-Podpiera, A. and J. Podpiera (2008): The Czech Transition Banking Sector Instability: The Role of Operational Cost Management, Economic Change and Restructuring, 41(3), pp. 209-219.

Download  CNB WP No. 6/2005 (pdf, 304 kB)