The Impact of Balance Sheet Cleaning on the Relationship Between Non-Performing Loans and Cost Efficiency: Bad Luck or Bad Management? A Case Study of Türkiye

Abstract

The study investigates whether balance sheet cleaning provides a benefit to the cost-effectiveness of banks. In this context, the study is based on the “bad luck” and “bad management” hypotheses developed by Berger and DeYoung (1997). Hypotheses; it was developed based on the assumption that there is a negative relationship between the increase in non-performing loans (NPL) and cost-effectiveness. Quarterly data of 10 deposit banks operating in Turkey in the 2012-2021 period were used. Stochastic Boundary Analysis (Batesse & Coelli (1995) was used as cost-effectiveness analysis method and Dumitrescu-Hurlin Panel Causality Test (Dumitrescu, E. I. & Hurlin, C. 2012) was used in causality research. While the results of the analysis supported the “bad management” hypothesis before the balance sheet cleaning, it supported the “bad luck” hypothesis after the balance sheet cleaning. According to this result; balance sheet cleaning reduces the “bad management” effect in banks. Banks have been advised to clean up their balance sheets. Our study is the first to investigate the effect of balance sheet cleaning on bank cost effectiveness under "bad luck" and "bad management" hypotheses and contributes to the literature in this sense. Moreover; in the study, hypotheses were tested using the Dumitrescu-Hurlin Panel Causality Test (2012) and this is also the first in the literature.

Keywords

• Balance sheet cleaning
• NPL
• cost-efficiency
• bad luck hypothesis
• bad management hypothesis
• JEL CODES: G21, G28, G29, G32

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