Faculty Scholarship 1994 - Present

Examining the Association Between Bank Failures and Operational Performance on Turkey: A Non-Stochastic Frontier Approach

Abstract and full paper available at http://www.erf.org.eg/html/12_AC.htm The goal of this paper is to understand what separates failing banks from the surviving banks in Turkey. By using 30-year long data, this will be the first paper to look at this issue in a developing country. Employing a non-parametric Data Envelopment Analysis (DEA) approach, we calculated the technical, pure technical, scale, allocative and cost efficiencies of the Turkish commercial banks for the period 1970-2000. We compared the efficiencies of surviving banks with those of the failed ones. The failed banks statistically had much lower efficiencies one year prior to their failure. In order to further investigate the causes of failure, we developed six probit early-warning regression models using efficiency as a proxy for management quality along with some other regressors. Adding the efficiency measure increased the classification accuracy of our early-warning model, and cost efficiency was the best among the other efficiency measures in terms of increasing the classification accuracy. Also, illiquidity was found to be the major cause of bank failures in Turkey, probably due to the fact that most banks failed in the times of severe financial crisis.