Financial crises, bank efficiency and survival: Theory, literature and emerging market evidence

Abstract The finance literature on efficiency and crisis at the macro-level and efficiency and default at the micro-level has hitherto grown surely but distinctly. In this comprehensive paper, we globally review and theoretically unify these two strands of research in studying the record level of bank failures and the deepest financial crisis of an emerging market, Turkey, with sixteen distinct measures of efficiency, stemming from two alternative methods, stochastic frontier analysis (SFA) and data envelopment analysis (DEA). The results show that efficiency scores tend to deteriorate gradually before crisis, hit bottom during crisis, and rebound after crisis. Inelastic inputs and elastic outputs seem to produce this pattern. The efficient banks have the highest survival rates. Managers of survivor banks are evidently better at controlling costs and scales, utilizing and allocating resources, generating assets, revenues and profits. Demotion to a lower efficiency class is a rare event in normal times but widespread during crises. The least efficient banks are the least likely to be acquired by private bidders. Default prediction models notably improve with DEA scores, off-balance sheet items, definition of failure with “factual insolvency”, deciles of efficiency, changes in some key variables, homogenous dataset, and efficiency scores based on quantities of inputs and outputs rather than their noisy prices.