The Impact of Economic Turbulence on Local Bank Efficiency: Does Common Wisdom Hold?

Abstract

Common theory suggests that banking performance is positively related to economic growth. This common wisdom in this paper is further tested by investigating whether economic turmoil has a meaningful impact on local bank technical efficiency. This study uses Regional Development Banks (RDB)- data in Indonesia as a case study during 2005 to 2015. The analysis is conducted using two stage approaches in which Data Envelopment Analysis (DEA) is used in the first stage, whilst in the second stage pooled OLS regression is employed. The findings show that most of local banks are technically inefficient throughout the period of analysis. Furthermore, the results indicate that crisis tends to have a significant effect, while the rest of the variables show various level of magnitude on local bank efficiency.