Financial Frictions, Bank Efficiency and Risk: Evidence from the Eurozone

Abstract

This paper employs a simultaneous equations approach to investigate the dynamics between financial frictions, efficiency and risk for eurozone's commercial banks. We consider two related channels through which financial frictions may arise: informational and market structure imperfections, and allow for a possible reverse causation from efficiency to banks' asset quality. The findings validate the presence of both channels of financial frictions and are consistent with the efficiency-lending quality hypothesis that low efficiency signals poor asset quality loans. Finally, our findings suggest that policies aimed at constraining banks' degree of openness may ultimately direct management choices towards riskier investments.

Bank supervision, regulation, and efficiency: Evidence from the European Union

“…15 Due to unavailability of data or/and missing values for a significant number of banks we had to exclude Bulgaria, Finland, Greece, Ireland and Romania from our EU dataset. 16 See, for more details, Chortareas et al (2011a). 17 This leads to the exclusion of 59 bank observations.…”

Interest rate liberalization and capital adequacy in models of financial crises

“…Economic freedom indexes have been associated with efficiency (Chortareas et al 2011), bank ratings (Pasiouras et al, 2006), and regulatory structure (Demirguc-Kunt et al, 2004;Barth et al, 2006;Chortareas et al, 2012). A common thread that emerged from these studies is that a high degree of liberalization boosts bank efficiency, reduces corruption in lending, or lowers banking system fragility.…”

Wealth Effects of Credit Risk Securitization in European Banking

“…It is underlined that moral hazard and agency problems between bank managers and bank shareholders could facilitate risk‐taking incentives, which may encourage an ‘over‐investing' behaviour by the bank's management (Demirgüç‐Kunt and Detragiache, 2002; and Stulz, 1990). As a consequence, financial frictions may lead to a reduced risk perception or an increasing risk tolerance by banks finally resulting in higher financial fragility (Chortareas et al, 2011).…”