A study conducted by researchers at the University of Coimbra (UC) concluded that the way revenues are managed by banks, be they profit or loss, can negatively impact banks’ efficiency.
The study, which analyzed 70 of the 117 banks supervised by the European Central Bank (ECB) and data from 2013 to 2017, concluded that “the way profit management is performed (profit or loss) using loan losses, which arise judgment value of bank managers, can negatively impact bank efficiency,” the UC said in a press release to the Lusa bureau.
The research also points to the importance of disclosure of this information by banking entities in their annual reports and accounts, as well as conducting internal and external audits of credit risk.
A team of three researchers from the Center for Research in Economics and Management (CeBER) and professors from the Faculty of Economics of the University of Coimbra (FEUC) conducted this analysis, aiming to understand the effect of profit management on banks’ efficiency to deepen.
The team noted that profit management in banks is measured by discretionary credit losses, which are determined by decision of directors, and non-discretionary credit losses, which result from applicable law or regulation.
The study found that moderate or high levels of discretionary impairments were found to be related to three factors: The “existence of low-quality loan portfolios at the banks analyzed increases the cost of monitoring and executing loans, which negatively affects their efficiency “, the “imposition of impairments in a non-regulatory manner negatively impacts confidence in the banking sector and, consequently, its efficiency”, and also “banks’ boards of directors do not appear to exercise proper oversight and control suitable for credit risk”.
When the level of these credit losses is reduced, bank efficiency is positive, “which may mean that managers decide not to devote enough resources to credit risk analysis […] that immediately increases efficiency,” say the researchers.
The authors of the study explain that “a bank is efficient when it maximizes its results (outputs) using limited resources (inputs)”.
In the analysis, total loans, cash and other income-generating assets were considered as results and interest, personnel costs and operating costs were considered as resources.
The management of bank income associated with discretionary loan impairments becomes particularly relevant in times of crisis, as “they can lead to less transparent income management practices with the aim of reducing unsatisfactory income or smoothing out high income ( making more impairments than the regulatory one is a cost to the bank, which reduces its results), which jeopardizes the efficient allocation of resources in the economy”.
According to this higher education institution, the research included data from two Portuguese banks.
The professors of the UC Faculty of Economics emphasize that “in a new period of crisis, such as the one we are currently experiencing, the importance of regulation and supervision of the banking sector, by the regulator, the regulator and also by civil society”.
The research confirms other elements that should be considered in future analysis of banks’ efficiency, such as “the degree of political connections of members of bank boards,” the team stressed.
Source: DN
