simultaneously Thus, the quality cut-off that determines which

simultaneously
operations, service quality and profitability than the information obtained
from benchmarking studies of these
three dimensions separately (Soteriou 1997).

 

Fiordelisi
et al. (2010), assess the inter-temporal relationships among bank efficiency,
capital and risk for the European
commercial banking industry. They build on previous work using Grangercausality
methods3 (Berger and De Young 1997) in a panel data framework. The results show
that subdued
bank efficiency (cost or revenue) Granger causes risk supporting the “bad
management” and the “efficiency version of the moral hazard
“hypotheses. They found only limited evidence of relationships
between capital and risk in line with the moral hazard hypothesis. The findings
showed lower
efficiency scores (either cost or revenue) suggest greater future risks and
efficiency improvements
tend to shore up banks’ capital positions. Their findings also emphasize the
importance of
attaining long-term efficiency gains to support financial stability objectives.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

 

Following
the profitability test as suggested by Spong et al. (1995), the main
differences between the “most efficient” and
“least efficient” bank seem to be mainly related to staff expenses. In
the
context of important technological improvements in banks’ productive processes,
the study suggested
an urgent need for greater labor market flexibility and the consequent
substitution of labor for capital. Moreover,
inefficient banks always appear to have lower levels of equity/assets and
higher levels
of nonperforming loans. Their finding also suggested that efficient banks are
assigning more attention and resources to loan origination,
monitoring and other credit judgment activities. Finally, the analysis
also shows that there is no clear relationship between the size of assets and
bank efficiency.

 

Yiwei
et al. (2011), found that the average profit efficiency of Eastern Europe is
close to the Central Eastern Europe region,
but average cost efficiency leaves considerable room for improvement.
They
also found that foreign owned banks are somewhat less cost efficient than
domestic private banks. It is also evident that progress in the
implementation of major economic reforms such as enterprise
restructuring and privatization are positively associated with banking
efficiency. Moreover, banking efficiency affects the development of the capital
market. This highlights that the relationship between
banks and the capital market is both competitive and complementary.
When
banks are very inefficient, an increase in banking efficiency actually results
in more borrowers migrating to the capital market. Beyond a certain
point, an increase in the efficiency of banks attracts more
borrowers to banks. Thus, the quality cut-off that determines which borrowers
go to the market and which go to the banks is non-monotonic with
respect to bank efficiency. It may not be possible to develop a
good capital market in an economy if it does not have good banks. Thus, in
developing a financial system, the initial focus should be on
improving the efficiency of banks.