Work detail

Informative value of the cost efficiency concept in banking

Author: Mgr. Marková Katarína
Year: 2009 - winter
Leaders: prof. Ing. Michal Mejstřík CSc.
Consultants:
Work type: Doctoral
Language: English
Pages: 124
Awards and prizes:
Link:
Abstract: The concept of cost efficiency has repeatedly been proven to have some signaling effect for
the risk of a bank failure. In this paper we examine the informative value of the efficiency
scores of institutions that have been experiencing distress within the current ‘subprime’ crisis.
For this purpose we employ the parametric stochastic cost frontier method and estimate the
cost frontier of five European banking sectors using the pre-crisis data of the period 2004-
2007. On a sample of 18 bailed-out institutions we then investigate whether abnormal
development in terms of relative cost efficiency preceded the distress.
We find that in all examined sectors, except of the British one, distressed institutions
performed prior to the crisis on average worse than their peers in terms of relative cost
efficiency. Besides, we observe that while the high-profile rescue cases of continental Europe
(Dexia, Fortis, HRE) were preceded by years of excessively poor performance, the bailed-out
British banks were in all concerns best performers within their relevant industries.
The paper is concluded by a discussion of the fundamental risks that result from the current
reshaping of the European banking industry.
Downloadable: Rigorosus thesis

Partners

Deloitte

Sponsors

CRIF
McKinsey
Patria Finance