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Financial openness, risk and bank efficiency: cross-country evidence

Financial openness, risk and bank efficiency: cross-country evidence
Financial openness, risk and bank efficiency: cross-country evidence
This paper assesses the interrelationship between financial openness, bank risk and bank profit efficiency using a cross-country sample of 2,007 commercial banks covering 140 countries over the period 1999-2011. To establish whether the impact of financial openness on both bank risk and profit efficiency occurs directly or through each one of the two bank characteristics (efficiency and risk, respectively), we begin our analysis by investigating the potential reverse Granger causality between profit efficiency and risk using a dynamic simultaneous model via system GMM estimation. We then account explicitly for the role of bank risk in the estimation of bank profit efficiency using stochastic frontier analysis, allowing for the influence of different measures of financial openness and risk alongside other control variables. Our results indicate that financial openness reduces bank profit efficiency directly, not through changes in bank risk. We also find that financial openness increases bank risk indirectly, through the decreased bank profit efficiency channel.
Financial openness, Risk, Bank efficiency, Stochastic frontier analysis, Granger causality
1572-3089
132-148
Luo, Yun
2ac0f228-573d-43e7-b309-1529b6f3d174
Tanna, Sailesh
4dd83d1e-e298-44e1-a99e-11b21672c285
De Vita, Glauco
002fc6bf-e5ed-4a13-8993-0ce5e1fc2005
Luo, Yun
2ac0f228-573d-43e7-b309-1529b6f3d174
Tanna, Sailesh
4dd83d1e-e298-44e1-a99e-11b21672c285
De Vita, Glauco
002fc6bf-e5ed-4a13-8993-0ce5e1fc2005

Luo, Yun, Tanna, Sailesh and De Vita, Glauco (2016) Financial openness, risk and bank efficiency: cross-country evidence. Journal of Financial Stability, 24, 132-148. (doi:10.1016/j.jfs.2016.05.003).

Record type: Article

Abstract

This paper assesses the interrelationship between financial openness, bank risk and bank profit efficiency using a cross-country sample of 2,007 commercial banks covering 140 countries over the period 1999-2011. To establish whether the impact of financial openness on both bank risk and profit efficiency occurs directly or through each one of the two bank characteristics (efficiency and risk, respectively), we begin our analysis by investigating the potential reverse Granger causality between profit efficiency and risk using a dynamic simultaneous model via system GMM estimation. We then account explicitly for the role of bank risk in the estimation of bank profit efficiency using stochastic frontier analysis, allowing for the influence of different measures of financial openness and risk alongside other control variables. Our results indicate that financial openness reduces bank profit efficiency directly, not through changes in bank risk. We also find that financial openness increases bank risk indirectly, through the decreased bank profit efficiency channel.

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Accepted/In Press date: 12 May 2016
e-pub ahead of print date: 19 May 2016
Published date: June 2016
Keywords: Financial openness, Risk, Bank efficiency, Stochastic frontier analysis, Granger causality

Identifiers

Local EPrints ID: 438340
URI: http://eprints.soton.ac.uk/id/eprint/438340
ISSN: 1572-3089
PURE UUID: aa4a8999-8bf2-460b-8fd8-81a8b9685908
ORCID for Yun Luo: ORCID iD orcid.org/0000-0001-8409-366X

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Date deposited: 06 Mar 2020 17:30
Last modified: 27 Apr 2022 02:16

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Contributors

Author: Yun Luo ORCID iD
Author: Sailesh Tanna
Author: Glauco De Vita

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