Bank Efficiency and Default in Brazil: Causality Tests

Periods of Financial Stability are associated to low bank efficiency and high non-performing loans in credit portfolios. Therefore, this paper studies the relationship between bank efficiency and non-performing loans. To evaluate the bank efficiency, we employ a Data Envelopment Analysis. We employ the Arelano-Bond dynamic panel approach and a panel-VAR to test whether non-performing loans Granger cause bank efficiency (bad luck hypothesis) or whether bank efficiency affects loan quality (management with risk aversion). Empirical results for the Brazilian case corroborate the second hypothesis.

Eficiência Bancária e Inadimplência: testes de Causalidade

Periods of Financial Stability are associated to low bank efficiency and high non-performing loans in credit portfolios. Therefore, this paper studies the relationship between bank efficiency and non-performing loans. To evaluate the bank efficiency, we employ a Data Envelopment Analysis. We employ the Arelano-Bond dynamic panel approach and a panel-VAR to test whether non-performing loans Granger cause bank efficiency (bad luck hypothesis) or whether bank efficiency affects loan quality (management with risk aversion). Empirical results for the Brazilian case corroborate the second hypothesis.