*Policy Implications*

The study provides several policy implications. Our results indicated that banks need to be sufficiently capitalized. This may require regulations setting capital adequacy requirements that the bank could achieve by attracting capital from shareholders and investors, or acquired through mergers and acquisitions. Our results also support regulatory authorities forcing the less capitalized banks to merge.<sup>8</sup>

<sup>7</sup> The negative impact on efficiency of banks was due to generating higher NPLs and administrative expenses faced by banks as a result of crises in the regions of South Asia and emerging Europe.

<sup>8</sup> For example, if a small bank is merged with a large bank, then it is an empirical question whether or not the effect of the larger size on efficiency would outweigh the effect of improved capital adequacy. This study helps answer such empirical questions.

A high proportion of non-performing loans increases the risk of bank failures, macroeconomic crisis, and contagion, depending on whether the accumulation of non-performing loans took place at a single bank, within the banking system, or in countries across the region, respectively.

Finally, good macroeconomic managemen<sup>t</sup> provides an environment in which banks can perform efficiently. Our results indicated that two dimensions of this environment were economic growth and low inflation.

**Author Contributions:** The research problem was identified by A.Q.; the analytical solution was pointed out by K.R.; The algorithmic implementation was performed by A.Q.; Both authors contributed to the specification of models and the interpretation of results; the paper was written by A.Q. with input from K.R. who also supervised the research.

**Funding:** This research received no external funding.

**Acknowledgments:** We are grateful to two anonymous referees for their helpful suggestion. We are responsible for any remaining errors.

**Conflicts of Interest:** The authors declare no conflict of interest.
