Financial Frictions, Bank Efficiency and Risk: Evidence from the Eurozone

Authors

  • Georgios E. Chortareas,

    1. The first author is from the Department of Economics, University of Athens, Greece. The second author is from the Essex Business School, University of Essex, Colchester, UK. The third author is from the Department of Business and Management, University of Sussex, Brighton, UK. They wish to thank Andrew Stark (editor) and an anonymous referee for many insightful comments, which have led to substantial improvements in the paper. They are also grateful to Dimitris Chronopoulos, Steve Miller, Dimitris Moschos, Yanis Varoufakis as well as conference participants at the Eastern Economic Association Conference held in New York in February 2007 for helpful comments and discussion.
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  • Claudia Girardone,

    1. The first author is from the Department of Economics, University of Athens, Greece. The second author is from the Essex Business School, University of Essex, Colchester, UK. The third author is from the Department of Business and Management, University of Sussex, Brighton, UK. They wish to thank Andrew Stark (editor) and an anonymous referee for many insightful comments, which have led to substantial improvements in the paper. They are also grateful to Dimitris Chronopoulos, Steve Miller, Dimitris Moschos, Yanis Varoufakis as well as conference participants at the Eastern Economic Association Conference held in New York in February 2007 for helpful comments and discussion.
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  • Alexia Ventouri

    1. The first author is from the Department of Economics, University of Athens, Greece. The second author is from the Essex Business School, University of Essex, Colchester, UK. The third author is from the Department of Business and Management, University of Sussex, Brighton, UK. They wish to thank Andrew Stark (editor) and an anonymous referee for many insightful comments, which have led to substantial improvements in the paper. They are also grateful to Dimitris Chronopoulos, Steve Miller, Dimitris Moschos, Yanis Varoufakis as well as conference participants at the Eastern Economic Association Conference held in New York in February 2007 for helpful comments and discussion.
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Address for correspondence: Claudia Girardone, Essex Business School, University of Essex, Wivenhoe Park, Colchester, CO4 3SQ, U.K.
e-mail: cgirardone@essex.ac.uk

Abstract

Abstract:  This paper employs a simultaneous equations approach to investigate the dynamics between financial frictions, efficiency and risk for eurozone's commercial banks. We consider two related channels through which financial frictions may arise: informational and market structure imperfections, and allow for a possible reverse causation from efficiency to banks’ asset quality. The findings validate the presence of both channels of financial frictions and are consistent with the efficiency-lending quality hypothesis that low efficiency signals poor asset quality loans. Finally, our findings suggest that policies aimed at constraining banks’ degree of openness may ultimately direct management choices towards riskier investments.

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