Banking efficiency, risk and stock performance in the European Union banking system : the effect of the world financial crisis
thesisposted on 08.08.2014, 14:00 by Saleem Mohammed Ali Janoudi
This thesis has three main objectives; first, it assesses and evaluates cost and profit efficiencies of the European Union banking system by employing the stochastic frontier analysis (SFA) over the period 2004-2010. It divides the EU region into four groups; the entire EU region, the old and the new EU countries as well as the GIIPS countries. Second, this study investigates the determinants of bank cost and profit inefficiencies with the focus mainly being on the role of banking risks and the world financial crisis (2007-2009) in affecting banking efficiency. Third, this thesis evaluates the impact of different variables on bank stock returns, with the emphasis on bank efficiency, risk and the world financial crisis, over the period 2004-2010. The empirical findings show that commercial banks in the EU improve their cost and profit efficiencies on average between 2004 and 2010. Also, banks in the old EU countries appear to be more cost efficient but less profit efficient compared to banks in the new EU countries. Interestingly, the empirical analysis concludes that overall insolvency, credit and liquidity risks have significant and positive effects on bank cost and profit inefficiencies during the world financial crisis, suggesting that banks that maintain less risk outperform their counterparts during crisis time. The world financial crisis appears to affect negatively both cost and profit efficiencies of EU banks; however, it has stronger negative effect on banks in the old EU member states than in the new EU countries. Finally, the results show that changes in cost and profit efficiencies along with capital and size variables appear to have a positive and significant influence on bank stock performance in the EU and that bank stock returns are significantly sensitive to market and interest rate risks.