University of Twente Student Theses


The relation among non-performing loans, operating efficiency, and capitalization in commercial banking

Benthem, C.S. van (2017) The relation among non-performing loans, operating efficiency, and capitalization in commercial banking.

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Abstract:This study examines the relationship among non-performing loans, operating efficiency, and capitalization. The study tests five hypotheses, namely “bad management”, “skimping”, ‘bad luck”, “moral hazard”, and “regulation”. The dataset contains thirty of the largest worldwide commercial banks, measured in total assets. In addition, the study tries to test for differences in European commercial banks. The findings are multisided; the analysis shows evidence for “bad management” which is considered leading for the entire dataset. The result indicates that increases in operating efficiency are followed by higher levels of non-performing loans, which suggest management behaviour influences non-performing loans. Secondly, the “skimping” hypothesis is confirmed for a sub-sample of the most efficient banks suggesting management of the banks deliberately save on short-term non-interest expenses e.g. monitoring costs which lead to higher ratios of non-performing loans in the future. Thirdly, “bad luck” is supported for European banks, suggesting external events affect non-performing loans. Fourthly, “moral hazard” in the banking sector is confirmed for the separate samples of most efficient as well for the most inefficient banks. In short, capitalization decreases are followed by increases in non- performing loans, indicating banks’ management have incentives to increase the risk in their portfolios. Finally, the “regulation” hypothesis is supported for the European sample, implying increases in non-performing loans lead to greater capital ratios. The finding suggests that the Basel III regulation is having the desired effect as regulators implied.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:83 economics, 85 business administration, organizational science
Programme:Business Administration MSc (60644)
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