Abstract
There seem to be inconclusive results regarding the interactions between bank efficiency, default risk and bank capital. This study tries to assess the dynamic interactions between efficiency estimates, default risk and bank capital in the Ghanaian banking industry, using bank specific panel data for 20 Ghanaian banks from 2007 to 2015. We employ panel vector autoregressive models (VAR) models which are estimated using generalized method of moments (GMM) to examine the interactions. The results give an indication that bank default risk has negative and statistically significant impact on cost efficiency but exerts only a mild influence on profit efficiency. However, there exist weaker evidence on the impact of both efficiencies on bank default risk. Bank capital on the other hand has significant positive impact on cost and profit efficiencies but both efficiencies have insignificant impact on bank default risk. Key words: Efficiency, bank capital, Stochastic Frontier Approach (SFA), default risk.
Highlights
The measurement of bank efficiency plays a pivotal role in the accurate assessment of the performance of individual banks and the industry as a whole, whiles providing information concerning the overall stability of the entire financial system
Profit efficiency estimates show an average of 60.52% and 65.29% for listed and unlisted banks respectively, indicating that listed banks tend to outperform their unlisted counterparts in terms profit efficiency
There seem to be inconclusive results regarding the interaction between bank efficiency, default risk and bank capital
Summary
The measurement of bank efficiency plays a pivotal role in the accurate assessment of the performance of individual banks and the industry as a whole, whiles providing information concerning the overall stability of the entire financial system. Program (FINSAP) in 1988, the Ghanaian banking industry has evolved over the past decade from a regime characterized by controls to a market based regime, with sound financial liberalization and integration, rapid growth of new financial products and technologies, consolidation in the industry as well as increased competition (BOG, 2013). This development brings extra burden on the banks with respect to the management of their risk, and achieving the desired level of efficiency in their operations.
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