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Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector

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  • Takahashi, Fábio Lucas
  • Vasconcelos, Marcos Roberto

Abstract

This study aims to analyze the impact of non-performing loans (NPLs) on the technical efficiency of banks in the Brazilian banking sector and to identify determinants of bank efficiency. The Directional Distance Function (DDF) method is used to measure banks’ technical efficiency and identify the factors that affect it. The results show that NPLs negatively impact efficiency, compromising banking operations and reducing the ability to produce new loans, affecting profitability. From 2003 to 2019, foreign banks were, on average, more efficient than domestic public and private banks. During COVID-19 (2020–2022), federal public banks were the most efficient. The analysis also suggests that the low efficiency of domestic public banks is associated with the lower technical quality of state public banks. The practical implications of this study are that banks must manage their NPLs effectively to improve their efficiency and profitability. This study's originality lies in analyzing the determinants of bank efficiency in Brazil, which can help banks improve their efficiency and performance.

Suggested Citation

  • Takahashi, Fábio Lucas & Vasconcelos, Marcos Roberto, 2024. "Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323010231
    DOI: 10.1016/j.frl.2023.104651
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    More about this item

    Keywords

    Bank efficiency; Two-stage analysis; Directional distance function; Non-performing loans; Brazilian banks;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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