Does efficiency help banks survive and thrive during financial crises?

Assaf, A.G. and Berger, A.N. and Roman, R.A. and Tsionas, M.G. (2019) Does efficiency help banks survive and thrive during financial crises? Journal of Banking and Finance, 106. pp. 445-470. ISSN 0378-4266

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Abstract

We examine how bank efficiency during normal times affects survival, risk, and profitability during subsequent financial crises using data from five U.S. financial crises and preceding normal times. We find that cost efficiency during normal times helps reduce bank failure probabilities, decrease risk, and enhance profitability during subsequent financial crises, while profit efficiency has limited benefits. Results suggest that cost efficiency better measures management quality, while profit efficiency may partially reflect temporary high returns from risky investments during normal times. Findings have policy implications and imply that improving bank cost efficiency during normal times may promote better financial crisis performance.