Measuring Bank Profit Efficiency

This paper proposes that a variant of the Battese and Coelli (1995) inefficiency model can be applied as a consistent and unifying framework in exploring the determinants of credit institutions’ profit inefficiency scores. To date, work concerned with the potential determinants of credit institutions' profit inefficiency levels has addressed the issue in either a single-step or multi-step process. In the former, inefficiency scores are conditioned by region and bank-specific indicators, while in the latter, generated inefficiency scores are subsequently regressed on a set of potential correlates. The approach proposed here allows these issues to be explored jointly in a statistically consistent manner. The model is applied to a sample of banks from Ireland, the UK, Canada and Australia.

Labour Cost Efficiency in UK and Irish Credit Institutions

This paper presents aggregated cost efficiency scores for a balanced panel of British and Irish credit institutions and relates these scores to loan loss reserves as a first step in investigating their usefulness as possible indicators of financial fragility. The efficiency scores are obtained using the two most popular methods of efficiency measurement – data envelopment analysis (DEA) and the stochastic frontiers approach.

Retail Interest Rate Pass-Through: The Irish Experience

Most central banks use a short-term interest rate such as the one-month money market interest rate as their main instrument of monetary policy. Changes to this short-term interest rate are the first important step in the transmission of monetary policy. Consumption and investment decisions made by households and firms will be affected by the rate of interest rate charged to them by banks and other financial intermediaries. A critical element of the transmission of monetary policy is the degree and speed at which changes in the short-term policy rate are transmitted to retail rates faced by firms and households. The term pass through refers to the extent to which changes in money market rates are reflected in changes in retail rates. This paper aims at increasing our understanding of this particular aspect of the monetary transmission mechanism in an Irish context between 1980 and 2001. In particular, we seek to answer two questions. 1) To what extent are changes in the one-month money-market rate passed through to various retail lending rates? 2) What is the speed at which changes in this money market rate transmitted to these lending rates? Understanding this process is important since it will determine in part how sensitive the domestic economy is to monetary policy changes as well as determining the speed at which the real economy responds to such policy rate changes. One of our main findings is that pass through from the money market rates to retail lending rates is not complete. In other words, lending rates respond less than one for one to changes in money market rates. For example, a one per cent change in the money market rate results in less than 0.8 of one per cent pass through to mortgage rates. Our results for the speed of adjustment are consistent with those of previous international studies. A significant part of our analysis is that we document the effect of a number of the more substantial developments in the financial environment over the sample period, namely, the institutional arrangements regarding the setting of retail rates, changes in competition and regulatory regimes in financial markets and changes in the conduct and operation of monetary policy. We find that such structural change has had a significant effect on the relationship between the money market rate and the various lending rates both in terms of pass through and speed of adjustment during this period. For example, we find that the dismantling of so called ‘matrix’ (an agreement on the setttng of various retail rates between the Central Bank and the Associated Banks) led to an increase in the degree of pass through between the money market rate and all lending rates considered. Failure to account for such change will lead to biased estimates of both the degree of and speed of pass through from money market rates to lending rates.

Assessing portfolio credit risk changes in a sample of EU large and complex banking groups in reaction to macroeconomic shocks

In terms of regulatory and economic capital, credit risk is the most significant risk faced by banks. We implement a credit risk model - based on publicly available information - with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk profiles across these LCBGs and over time. Furthermore, the results show that large negative shocks to real GDP have the largest impact on the credit risk profiles of banks in the sample. Notwithstanding some caveats, the results demonstrate the potential value of this approach for monitoring financial stability. JEL Classification: C02, C19, C52, C61, E32macroeconomic shock measurement, Portfolio credit risk measurement, stress testing

What drives EU banks’ stock returns? Bank-level evidence using the dynamic dividend-discount model

We combine the dynamic dividend-discount model with an accounting-based vector autoregression framework that allows for a decomposition of EU banks' stock returns to cash-flow and expected return news components. The main findings are that while the bulk of the variability of EU banks' stock returns is due to cash flow shocks, the expected return shocks are relatively more important for larger than for smaller banks. Moroever, variables used in the literature as cash-flow proxies explain a higher share of the cash-flow component of the total excess returns for smaller than for larger EU banks. This suggests that large banks could be more prone to market wide news and events - that in the literature are associated with the expected return news component - as opposed to the bank-specific news, typically assumed to be incorporated in the cash-flow component. JEL Classification: C33, G12, G21Bank stock return predictability, cash flow news, panel VAR estimation, return decomposition

Retail Interest Rate Pass-Through - The Irish Experience

In this paper, we examine the extent to which changes in the money market interest rate are passed through to a number of retail lending rates between 1980 and 2001. In addition, we analyse the speed of adjustment of these lending rates with respect to such changes in the money market rate. Our main findings are - (1) pass-through from the money market rate to lending rates is not complete (2) the speed of adjustment varies quite considerably across alternative lending rates and (3) there has been significant structural change in the relationship between the money market rate and lending rates both in terms of pass-through and speed of adjustment during this period.

House Prices and Mortgage Credit: Empirical Evidence for Ireland

In Ireland, real property prices have increased at an average of 12 per cent per annum between 1996 and 2002 with residential mortgage credit also increasing substantially. The Irish economy provides an interesting case study of a rapidly growing economy with very low nominal interest rates experiencing a housing boom. In this paper, we empirically examine the relationship between domestic bank credit and Irish house prices. Using a number of econometric approaches, we find evidence of a long-run mutually reinforcing relationship. We use the long-run results to underpin a short-run system of the housing and credit sector and show that the short run response of house prices and credit to a one off increase in household disposable income is felt for almost three years after the initial change.

Cost Efficiency in UK and Irish Credit Institutions

This paper presents aggregated cost efficiency scores for a balanced panel of British and Irish credit institutions and relates these scores to loan loss reserves as a first step in investigating their usefulness as possible indicators of financial fragility. The efficiency scores are oobtained using the two most popular methods of efficiency measurement - data envelopment analysis (DEA) and the stochastic frontiers approach.

Dry Matter Intake, Milk Performance and Production Efficiency from Spring Calving Dairy Cows Offered Grass-Only, Grass-White Clover and Total Mixed Ration Diets

In pasture-based dairy production systems, dry matter intake (DMI) is one of the main factors curtailing milk production and production efficiency. The inclusion of white clover (Trifolium repens L.) in swards of perennial ryegrass (PRG; Lolium perenne L.) can increase DMI from increased sward nutritive value over a grass-only sward. Feeding a fully balanced TMR diet can enhance milk production as a result of greater DMI and through greater control of feed quality. Therefore, the objective of this study was to determine the relationship between DMI, milk production, and energy efficiencies for dairy cows consuming different diets. A farm systems experiment was conducted from 2015-2021. The three treatments were: TMR (100% confinement; grass silage, maize silage, concentrate), grass-only herbage (GR), or grass-white clover herbage (CL). Dry matter intake was estimated 17 times over the duration of the study, using the n-alkane technique for the GR and CL treatments, and an electronic roughage intake control system for the TMR treatment. Simultaneously, milk production, and production efficiencies were also measured. Significant increases (P \u3c 0.001) in milk production, DMI, and production efficiencies were observed when cows consumed the TMR diet compared with the grazing diets. Greater energy (P \u3c 0.001) was available for milk production after maintenance for the TMR treatment. All treatments had similar energy (148.64 g Unité fourragère lait; UFL) available for milk solids (MS) production after accounting for maintenance. Cows consuming the TMR diet had significantly higher (P \u3c 0.001) daily energy intake (+17%) compared to the pasture-fed cows. Cows grazing the CL swards consumed 1.03 kg greater (P \u3c 0.001) total DMI compared to the GR cows. This translated into greater daily milk (+1.2 kg) and MS (0.12 kg) compared with the GR treatment. The current study highlights the benefits of a TMR and ryegrass/white clover diet for increasing milk production, and energy efficiencies above a grass-only diet