Title: Exchange rate fluctuations and bank cost efficiency: Evidence from an emerging economy
Authors: Mikhail Mamonov - CERGE-EI (Czech Republic) [presenting]
Artem Prokhorov - University of Sydney (Australia)
Christopher Parmeter - University of Miami (United States)
Abstract: Similarly to advanced countries, emerging economies may have substantial variation in banks' involvement in foreign currency operations. However, as opposed to advanced countries, these economies may exhibit much higher volatility of nominal exchange rates. In these circumstances, the banks bear additional costs due to revaluations of their international operations, especially during the periods of systemic depreciation of exchange rates. Such revaluations are often disconnected from the banks' productivity and cost-efficiency. For Russian banks between 2004 and 2020, we document that the revaluations heavily distort the cost-efficiency rankings. This conceals the actual distribution of cost inefficiency where banks with mid-range efficiency scores change their rankings in surprising ways after we account for the revaluations. Highly efficient and highly inefficiency banks preserve their rankings, that is exhibit tail-dependence. These results are robust to such bank characteristics as ownership type and the size of total assets, and they hold during crisis and non-crisis periods. We discuss how revaluations relate to market power and risk aversion, and we find that the Demsetz efficient structure hypothesis holds only when the revaluations are accounted for. We conjecture such results apply to emerging markets more generally and offer several policy recommendations.