Does Greater Capital Hamper the Cost Efficiency of Banks?

Jitka Lešanovská, Laurent Weill

The aim of our research is to analyze the relation between capital and bank efficiency by considering both directions of the Granger causality for the Czech banking industry. We use an exhaustive dataset of Czech banks from 2002 to 2013. We measure the cost efficiency of banks using stochastic frontier analysis. We perform Granger-causality tests to check the sign and significance of the causal relation between capital and efficiency. We embed Granger-causality estimations in the GMM dynamic panel estimator. We find no relation between capital and efficiency, as neither the effect of capital on efficiency, nor the effect of efficiency on capital is significant. The financial crisis does not influence the relation between capital and efficiency. Our findings suggest that tighter capital requirements like those under Basel III do not affect financial stability through the efficiency channel. Policies favoring capital levels and efficiency of the banking industry can therefore be designed separately.

JEL codes: G21, G28

Keywords: Bank capital, Basel III, efficiency

Issued: December 2015

Download: CNB WP No. 10/2015 (pdf, 199 kB)