The Relationship Between Bank Efficiency and Risk and Productivity Patterns in the Romanian Banking System

The Relationship Between Bank Efficiency and Risk and Productivity Patterns in the Romanian Banking System

DOI: 10.4018/978-1-5225-9269-3.ch002

Abstract

This chapter aims to provide additional empirical evidence on the relationship between bank efficiency and risk and productivity patterns in the Romanian banking system. The empirical analysis is based on a data envelopment model and an input slack-based productivity index, in order to examine commercial bank cost efficiency and productivity patterns in the Romanian banking system over the period of 2005 to 2011. The empirical results lead to the conclusion that the contribution of the funds to the increase in productivity is the most significant, while that of labor and capital productivity is lower.
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Introduction

The banking system has a major influence on the economic development of a country. Moreover, within an emerging economy, the efficient functioning of the banking system in allocating resources represents a condition without which the shift to a developed economy cannot be achieved. In Romania, the banking system is the most important part of the financial system, holding more than 90% of its financial assets. Given these conditions, the efficiency and productivity of the Romanian banking system are two elements without which the economy cannot grow in a sustainable and robust manner.

In the last two decades, the banking system in Romania has evolved in a similar manner to the ones in the other Eastern and Central European countries. To be more precise, the shift from a centralized economy to a market economy involved the reorganization of the banking system on two levels and also the reform of the legislative framework, liberalization and privatization. Furthermore, at the end of the century, the banking system in Romania had to face a crisis characterized by bank failures and by severe deterioration of the performance of other banks. Getting rid of non-viable banks and also the end of the privatization process marked, at the beginning of 2000, the entrance of the banking system in a new development period.

This was followed by a period in which the banking system benefited from regained economic growth. Until 2008 the banks in Romania had been extending their loan portfolios in conditions of increased profitability. An important particularity of the banking system in Romania is that more than 90% of the financial assets are owned by foreign banks or banks controlled by foreign shareholders (National Bank of Romania, 2013). Moreover, the Romanian banking system was significantly financed by foreign funds. Thus, the banking system in Romania, as well as other banking systems in Central and Eastern Europe, became vulnerable in the face of sudden slowdown of the external loans that occurred in the autumn of 2008 (Montoro & Rojas-Suarez, 2012; Klingen, 2013). Also, the banking system in Romania was affected after 2008 by a considerable increase of the nonperforming loans. Thus, if in 2008 the percentage of nonperforming loans was 2.75%, in 2013 it had reached 21.75% (National Bank of Romania, 2013). The high percentage of nonperforming loans reflects an unreliable policy adopted by credit institutions in a period of economic growth and also the existence of various unsustainable domestic booms. In our opinion, in Romania, the financial crisis has substantially modified the way banks function and as such the evaluation of efficiency, productivity and risks became the most important component of banks’ strategy.

With regard to the organization, the Romanian banking system is a universal one, dominated by commercial banks. Moreover, for the credit institutions in Romania, there is no aspect that particularizes their form of organization, the structure of shareholders or the nature of the ongoing activities. Most of the credit institutions are organized as banks, despite the fact that the law allows the establishment of specialized credit institutions. It is worth mentioning that the banking system in Romania encompasses two building societies, as well as one central credit cooperatives, which include 46 credit cooperatives. Nevertheless, the market percentage of the building societies and credit cooperatives is under 1%.

Having in view the major importance of the banking system within the financial system and that of the commercial banks within the banking system and also the risks the banks have faced in the context of the financial crisis, this study aims at emphasizing the nexus between banks’ efficiency and the risks they have undertaken. Moreover, we have also highlighted the relation between banks’ efficiency, concentration and performance. Banks’ cost efficiency and its determinants will be evaluated in two stages. Firstly, we will obtain the efficiency scores through the data envelopment analysis. Secondly, through a Tobit regression, we will evaluate the determinants of banks’ efficiency. A second objective of the study is to emphasize the patterns of banks’ productivity and also its sources. To this aim we will use an advanced productivity index that allows the disintegration of productivity in accordance with the contribution of each input (Chang et al., 2012).

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