TY - JOUR

T1 - Bank cost efficiency and credit market structure under a volatile exchange rate

AU - Mamonov, M.

AU - Parmeter, C.F.

AU - Prokhorov, A.B.

N1 - Export Date: 19 October 2024 CODEN: JBFID Адрес для корреспонденции: Parmeter, C.F.; Department of Economics, United States; эл. почта: cparmeter@bus.miami.edu Сведения о финансировании: Russian Science Foundation, RSF Текст о финансировании 1: We are grateful to Thorsten Beck (the Editor), the two anonymous referees, Indraneel Chakraborty, Husnu Dalgic, Karligash Glass, Marek Kapicka, Subal Kumbhakar, Michael McCracken, Peter Schmidt, Ctirad Slavik, Martin Uribe, and participants of the 13th International Conference of the ERCIM WG on Computational and Methodological Statistics (CMStatistics 2020, London), 12th (virtual) North-American Productivity Workshop (vNAPW 2021, Miami), 1st Inaugural International Conference on Econometrics and Business Analytics (iCEBA 2021, Saint-Petersburg), and 5th International Conference on Econometrics and Statistics (EcoSta 2022, Japan) for helpful comments and discussion. Prokhorov's research was supported by a grant from the Russian Science Foundation, Russia (20-18-00365)

PY - 2024/11/1

Y1 - 2024/11/1

N2 - We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. First, we document that Revals constitute the largest part of the banks’ total costs, 26.5% on average, with considerable variation across banks. Second, we find that stochastic estimates of cost efficiency are both severely downward biased – by 30% on average – and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. Third, we show that Revals are triggered by the mismatch in the banks’ FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble's exchange rate. Fourth, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks’ distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets. © 2024 Elsevier B.V.

AB - We study the impact of exchange rate volatility on cost efficiency and market structure in a cross-section of banks that have non-trivial exposures to foreign currency (FX) operations. We use unique data on quarterly revaluations of FX assets and liabilities (Revals) that Russian banks were reporting between 2004 Q1 and 2020 Q2. First, we document that Revals constitute the largest part of the banks’ total costs, 26.5% on average, with considerable variation across banks. Second, we find that stochastic estimates of cost efficiency are both severely downward biased – by 30% on average – and generally not rank preserving when Revals are ignored, except for the tails, as our nonparametric copulas reveal. To ensure generalizability to other emerging market economies, we suggest a two-stage approach that does not rely on Revals but is able to shrink the downward bias in cost efficiency estimates by two-thirds. Third, we show that Revals are triggered by the mismatch in the banks’ FX operations, which, in turn, is driven by household FX deposits and the instability of Ruble's exchange rate. Fourth, we find that the failure to account for Revals leads to the erroneous conclusion that the credit market is inefficient, which is driven by the upper quartile of the banks’ distribution by total assets. Revals have considerable negative implications for financial stability which can be attenuated by the cross-border diversification of bank assets. © 2024 Elsevier B.V.

KW - Bank ownership

KW - Bank production

KW - Banks

KW - Copulas

KW - Currency revaluation

KW - Foreign currency operations

KW - Market structure

UR - https://www.mendeley.com/catalogue/67bbbce5-15eb-33bc-8f38-7a0b9cc8a956/

U2 - 10.1016/j.jbankfin.2024.107285

DO - 10.1016/j.jbankfin.2024.107285

M3 - статья

VL - 168

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

ER -