Monitoring bank performance in the presence of risk

Abstract

This paper devises management and accounting tools for monitoring bank performance. We first propose a multidimensional efficiency measure that integrates credit risk and is adapted to the real banking technology. Second, traditional accounting ratios complement the analysis. Third, the impact of different risk measures over efficiency and accounting ratios is shown. Fourth, we examine the effect of CEO turnover on future performance. An empirical application considers a unique dataset of Costa Rican banks during 1998-2007. Results reveal that performance improvements follow regulatory changes and that risk explains differences in performance. Non-performing loans negatively affect efficiency and return on assets, whereas the capital adequacy ratio positively affects the net interest margin. This supports that incurring monitoring costs and having higher levels of capitalisation may enhance performance. Finally, results confirm that appointing CEOs from outside the bank significantly improves performance, thus suggesting the potential benefits of new organisational practices.

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