A study conducted by researchers at the University of Coimbra (UC) concluded that the way banks manage profits, whether profit or loss, can negatively impact banking performance.
The study, which analyzed 70 out of 117 banks supervised by the European Central Bank (ECB) and analyzed data from 2013 to 2017, concluded that “how profit (profit or loss) is managed ) using credit losses resulting from the value of the judgments of bank administrators, may adversely affect the efficiency of banking,” UC said in a press release sent to Lusa.
The study also points to the importance of disclosure of this information by banking structures in their annual reports and accounts, as well as internal and external audits of credit risk.
A group of three researchers from the Center for Research in Economics and Management (CeBER) and professors from the Faculty of Economics at the University of Coimbra (FEUC) conducted this analysis with the intention of deepening the impact of revenue management on bank performance.
The Group noted that profit management in banks is measured by discretionary loan impairment, which is determined by the decision of the directors, and non-discretionary loan impairment, which is the result of applicable law or regulation.
The study found that moderate or high levels of discretionary impairments were associated with three factors: “the presence of poor-quality loan portfolios in the analyzed banks increases the costs of monitoring and executing loans, which negatively affects their efficiency”, the creation of impairments in an unregulated way negatively affects confidence to the banking sector and, therefore, its efficiency”, as well as “the boards of directors of banks do not appear to exercise adequate monitoring and control, adequate to credit risk”.
When the level of these loan losses declines, banking efficiency becomes positive, “which may mean that managers decide not to spend enough resources on credit risk analysis. […] which immediately increases the level of efficiency,” the researchers say.
The authors of the study explain that “a bank is efficient when it maximizes its outputs (outputs) using resources (inputs) that are limited.”
In the analysis, the total amount of loans, liquid assets and other income-generating assets was considered as an output, while interest, personnel costs and operating expenses were considered as resources.
Managing bank revenues associated with discretionary loan impairment becomes particularly relevant during a crisis because “they can lead to less transparent revenue management practices to mitigate poor revenues or smooth out high revenues (creating more deterioration beyond regulatory ones). it is a cost to the bank that lowers its performance), which jeopardizes the efficient allocation of resources in the economy.”
According to this higher education institution, data from two Portuguese banks were included in the study.
Professors from the UCLA Department of Economics emphasize that “in a new period of crisis like the one we are now experiencing, the importance of regulation and oversight of the banking sector by the regulator, the supervisor, and also by civil society” .
The study points out other elements that should be considered when analyzing bank performance going forward, such as “the degree of political connections of members of bank boards of directors,” the team stressed.
Research paper “The Impact of Profit Management on Bank Performance: Data from ECB Controlled Banks” is available at https://doi.org/10.1016/j.frl.2022.103450.
LIFR // CCC
Lusa/The End
Author: Portuguese
Source: CM Jornal
I’m Tifany Hawkins, a professional journalist with years of experience in news reporting. I currently work for a prominent news website and write articles for 24NewsReporters as an author. My primary focus is on economy-related stories, though I am also experienced in several other areas of journalism.