Lending efficiency in European banks: a stochastic frontier analysis

Clovis, J ORCID: https://orcid.org/0000-0001-7390-9117 and Caiazzo, S, 2024. Lending efficiency in European banks: a stochastic frontier analysis. In: Veysel Kaya, M and Chodnicka-Jaworska, P, eds., Conference proceedings of “2nd RSEP International Multidisciplinary Conference” 28-29 May 2024, Istanbul, Turkiye. Ankara, Turkey: BC Grup Inc., pp. 26-40. ISBN 9786259841830

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Abstract

This paper investigates the topic of lending efficiency in a selection of European operating banks. We implement a stochastic frontier approach to analyse a panel of banks operating in France, Germany, Spain and the UK from 2013 to 2018. Lending efficiency is defined by Hughes and Moon (2018) as the level of non-performing loans relative to total loans (NPL ratio) that is only created by the credit risk that is inherent in loan portfolios of banks. The difference between this ‘best practice’ NPL ratio and the observed one is deemed to be due to lending inefficiency that is ascribed to bad credit risk evaluation and/or deficient loan monitoring. In order to define and estimate a measure of banks’ lending inefficiency, we use Hughes and Moon (2018) as a benchmark and apply a model that estimates a stochastic frontier (representing full efficiency in lending as determined by bank-specific, industry-specific and macro factors) which delivers a composite error term made of a random component and an ‘inefficiency’ component. More precisely, we design a specification of a fixed-effects stochastic frontier model with time-varying inefficiency; a varient to that developed by Lee and Schmidt (1993). We find our estimation of the stochastic frontier to be significant and present the evidence in graphs, and formal tests. Further, in sub-sampling, we observe a positive and meaningful correlation between NPL ratios and two related measures of lending inefficiency: percent inefficiency and excess NPL ratio.

Item Type:	Chapter in book
Description:	Paper presented at the 2nd RSEP International Multidisciplinary Conference, 28-29 May 2024, Istanbul, Turkey.
Creators:	Clovis, J. and Caiazzo, S.
Publisher:	BC Grup Inc.
Place of Publication:	Ankara, Turkey
Date:	10 June 2024
ISBN:	9786259841830
Identifiers:	Number Type 10.19275/RSEPCONFERENCES306 DOI 2218422 Other
Rights:	Creative Commons CC BY-NC-ND license.
Divisions:	Schools > Nottingham Business School
Record created by:	Jonathan Gallacher
Date Added:	19 Sep 2024 09:05
Last Modified:	19 Sep 2024 09:09
URI:	https://irep.ntu.ac.uk/id/eprint/52265

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