Risk preference and efficiency in Chinese banking

This paper aims to measure banking efficiency by considering risk preferences in 49 Chinese commercial banks during the period of 2004–2012. It adopts a method which allows for endogenous classification of three risk preferences, namely the conservative, moderate and aggressive risk modes, by changing direction vectors. Banking efficiency is measured on the basis of optimal risk preference. The findings show that the moderate risk preference is the most appropriate strategy to achieve technical efficiency in the Chinese banking sector. However, the aggressive risk preference involving low risk costs, compulsory credit spreads and scale expansion played a critical role in promoting the development of Chinese banking sector, but its effect decreased rapidly. The findings also imply that the average technical efficiency scores of joint stock commercial banks and city commercial banks were higher than those of state-owned commercial banks under the optimal risk preference, and that the measured efficiency mainly shows a trend of improvement over time.