Essays on the risk and efficiency of the banks

Rathore, Adhiraj Singh (2021) Essays on the risk and efficiency of the banks. PhD thesis, University of Glasgow.

Abstract

This thesis provides an in-depth discussion on the risk and efficiency of the banks. The thesis consists of three major empirical chapters. Chapter 1 is an introduction to the topic where backgrounds, motivations and contributions of the thesis are discussed.

Chapter 2 examines the role of the European Banking Authority(EBA)’s capital exercise and technical efficiency of the banks.In October 2011, the European Banking Authority (EBA), the institution charged with setting harmonised supervisory standards for banks in EU member states, announced that major European banking groups would have to increase their core tier 1 capital ratios to 9 percent of their risk-weighted assets by June 2012 (EBA, 2011b).Using a sample of 194 banks from 15 EU countries and bootstrap data envelopment analysis (DEA) to provide evidence on the impact of EBA’s capital exercise on banks’ efficiency.In the first stage of the analysis, we measure the efficiency by employing Boostrap DEA. We then use Double Bootstrap Truncated regression to investigate the impact of the capital exercise on banks’ technical efficiency. We estimate several specifications while controlling for bank-specific attributes and country-level characteristics accounting for macroeconomic conditions, financial development and market structure. The results indicate that EBA’s capital exercise came, as a shock for the banks would be contributing towards making the banks more stable.It would be preventing banks from excessive risk-taking activities. Furthermore,it would be allowing the banks to withstand the financial distress and contributing to banks becoming less prone to the systemic risk. The study finds that the capital requirements would be creating favourable economic conditions, which would be affecting the extent, depth, and quality of financial intermediation and banking services.

Chapter 3 provides a comprehensive analysis of the risk measures on the cost efficiency of the banks.The financial crisis revealed the problems in the banking sector for supervisors and other stakeholders in identifying and comparing the bank’s information across different jurisdictions. The Basel Committee found that there are no consistent international standards for categorising problem loans. This chapter looks into the role of the harmonised definition of Non-Performing Exposures and Funding Liquidity Risk on the cost efficiency of the banks.This chapter looks into the marginal effects of the risk measures on cost efficiency. Also, the chapter investigates the marginal effects of risk measures on cost efficiency over time and across different regions. The heteroscedastic stochastic frontier model is used for the estimation, which will allow finding the effect of each risk measure on the mean and variance of the cost efficiency.The results indicate Funding Liquidity Risk has a positive effect on the mean and the variance on the inefficiency effect. This means a bank with a higher Funding Liquidity Risk will have a lower and more varied cost efficiency. Non-Performing Exposures have a significantly positive effect on the mean and variance of the inefficiency effect. The study compares average cost efficiency and marginal effects of the risk measures on the mean and variance across the groups sorted by the criteria variables. The results indicate that there are non-linear effects of some of the risk factors such as Funding Liquidity Risk and Non-Performing Exposures on the mean and variance of the inefficiency effect.

Chapter 4 investigates into the role of Cross-Border Exposures and Liquidity Shocks on the technical efficiency of the banks.Using a sample of 1931 banks in 15 countries in Europe, the impact of cross-border banking, i.e., geographical diversification, on individual banks with liquidity shock in relation to the financial development of the home country. For measuring the technical efficiency, Weighted Russell Distance Directional Model (WRDDM) is used.The results indicate that the changes in the technical efficiency of the banks facing liquidity shocks are more unstable. The technical efficiency of the banks facing Liquidity Shocks is much lower during the Global Financial Crisis. The technical efficiency of the banks not facing liquidity shock is more similar to the average technical efficiency of the banks. The decline in the cross-border exposures was witnessed with a decline in efficiency. However, the decline was minimum in the domestic exposures. Following this, Honore’s Tobit Estimator results provide evidence of the cross-border exposures with liquidity shock on the efficiency of the banks in relation to the financial development of the home country. The results indicate that banks are more likely to invest in countries with similar levels of financial development. By investing in such countries, the bank can improve its technical efficiency. However, in countries with high financial development, the banks improve efficiency by reducing exposures from countries with lower financial development. The results indicate that the role of financial development and cross-border exposures play in the efficiency of the banks.

Chapter 5 puts together the main findings from the three essays and presents the concluding remarks.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Subjects: H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Supervisor's Name: Sermpinis, Professor Georgios and Tsoukas, Professor Serafeim
• Date of Award: 2021
• Depositing User: Theses Team
• Unique ID: glathesis:2021-82305
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 05 Jul 2021 06:22
• Last Modified: 05 Jul 2021 08:03
• Thesis DOI: 10.5525/gla.thesis.82305
• URI: https://theses.gla.ac.uk/id/eprint/82305