Energy shocks and bank efficiency in emerging economies

Abstract

Geopolitical conflicts often result in commodity price increases and supply-chain disruptions to the global economy. A recent example of the Russia-Ukraine War caused a significant increase in energy prices, resulting in a prospect of recession in the European Union countries and slow economic growth worldwide. This paper examines how energy shocks affect banks, which are an important intermediary for financial stability and economic growth. We extend the existing literature, which used oil prices as the proxy for energy shocks. Given that oil accounts for decreasing share of global primary energy, we instead used energy prices, consisting of oil, natural gas, coal, nuclear energy, hydroelectricity, and renewables, as the proxy for energy shocks. We measure banks' operational and investment efficiency using data envelopment analysis (DEA) and applied fixed effect, random effect, dynamic OLS, fully modified OLS, and dynamic panel generalized method of moments (GMM) models. Based on the data of 48 banks in seven emerging economies from 2001 to 2020, we find that energy shocks decrease banks' operational and investment efficiency, even after controlling for macroeconomic factors. This paper provides evidence of the direct effect of energy shocks on bank efficiency, extending the previous knowledge that oil shocks affect bank performance only indirectly, making a theoretical contribution to our understanding of energy shocks and bank performance. The findings are also important for policymakers in emerging economies to achieve steady economic growth and financial stability. Countries can limit the impact of energy shocks on bank efficiency by using hedging and gradual adjustment of interest rates.