Efficiency, Solvency, and Size of Banking Firms.

Are the most efficient risk-return banks more solvent than the inefficient banks? From a theoretical point of view, the answer is straightforward for non-financial firms, but it is not clear for banking firms. Likewise, if there is not a clear relationship between efficiency and solvency on the theoretical grounds, what is then the role of size in the efficiency solvency puzzle? This paper develops an empirical analysis both to test if the most efficient banks are also the most solvent, and to test the effects that size has on the solvency and efficiency of banks.