Advanced

The Relation between Efficiency, Non-Performing Loans and Capitalization in the Nordic Banking Sector

Quadt, Vivien LU and Nguyen, Tuyen LU (2016) NEKN02 20161
Department of Economics
Abstract (Swedish)
This paper analyzes relationships between efficiency, non-performing loans and capitalization in the Nordic banking sector (Denmark, Finland, Norway, Sweden and Iceland) based on a panel dataset of 40 banks from the period of 2006 to 2015. Efficiency is measured by the ratio of non-interest expense to net operating income, the ratio of loan loss provision to total loans serves as a proxy for non-performing loans and capitalization is the ratio of equity to total assets. The paper applies the Granger-causality technique and tests four hypotheses as suggested by Berger and De Young (1997): “bad management”, “skimping”, “moral hazard” and “bad luck” and one additional the “regulatory” hypothesis. All five hypotheses are tested based on the... (More)
This paper analyzes relationships between efficiency, non-performing loans and capitalization in the Nordic banking sector (Denmark, Finland, Norway, Sweden and Iceland) based on a panel dataset of 40 banks from the period of 2006 to 2015. Efficiency is measured by the ratio of non-interest expense to net operating income, the ratio of loan loss provision to total loans serves as a proxy for non-performing loans and capitalization is the ratio of equity to total assets. The paper applies the Granger-causality technique and tests four hypotheses as suggested by Berger and De Young (1997): “bad management”, “skimping”, “moral hazard” and “bad luck” and one additional the “regulatory” hypothesis. All five hypotheses are tested based on the relationships between the three variables. The paper finds evidence of the “bad luck” hypothesis only, which suggests that external factors increase the non-performing loans and management deals with this situation by accruing additional resources, which lowers the efficiency of the bank. (Less)
Please use this url to cite or link to this publication:
author
Quadt, Vivien LU and Nguyen, Tuyen LU
supervisor
organization
course
NEKN02 20161
year
type
H1 - Master's Degree (One Year)
subject
keywords
Banking, Efficiency, Non-Performing Loans, Capitalization, Management Behavior
language
English
id
8877802
date added to LUP
2016-06-13 14:13:19
date last changed
2016-06-13 14:13:19
@misc{8877802,
  abstract     = {This paper analyzes relationships between efficiency, non-performing loans and capitalization in the Nordic banking sector (Denmark, Finland, Norway, Sweden and Iceland) based on a panel dataset of 40 banks from the period of 2006 to 2015. Efficiency is measured by the ratio of non-interest expense to net operating income, the ratio of loan loss provision to total loans serves as a proxy for non-performing loans and capitalization is the ratio of equity to total assets. The paper applies the Granger-causality technique and tests four hypotheses as suggested by Berger and De Young (1997): “bad management”, “skimping”, “moral hazard” and “bad luck” and one additional the “regulatory” hypothesis. All five hypotheses are tested based on the relationships between the three variables. The paper finds evidence of the “bad luck” hypothesis only, which suggests that external factors increase the non-performing loans and management deals with this situation by accruing additional resources, which lowers the efficiency of the bank.},
  author       = {Quadt, Vivien and Nguyen, Tuyen},
  keyword      = {Banking,Efficiency,Non-Performing Loans,Capitalization,Management Behavior},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Relation between Efficiency, Non-Performing Loans and Capitalization in the Nordic Banking Sector},
  year         = {2016},
}