Abstract

There seem to be inconclusive results regarding the interactions between bank efficiency, default risk and bank capital. This study tries to assess the dynamic interactions between efficiency estimates, default risk and bank capital in the Ghanaian banking industry, using bank specific panel data for 20 Ghanaian banks from 2007 to 2015. We employ panel vector autoregressive models (VAR) models which are estimated using generalized method of moments (GMM) to examine the interactions. The results give an indication that bank default risk has negative and statistically significant impact on cost efficiency but exerts only a mild influence on profit efficiency. However, there exist weaker evidence on the impact of both efficiencies on bank default risk. Bank capital on the other hand has significant positive impact on cost and profit efficiencies but both efficiencies have insignificant impact on bank default risk.

Key words: Efficiency, bank capital, Stochastic Frontier Approach (SFA), default risk.