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Do undesirables matter on the examination of banking efficiency using stochastic directional distance functions

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  • Huang, Tai-Hsin
  • Chung, Ming-Tai

Abstract

This paper aims to gain further insights into whether the First Financial Restructuring (FFR) policy improves the technical efficiency of Taiwan’s banks during the period 1999–2012, using the directional technology distance function (DDF). DDF simultaneously allows for the expansion of the desirables and the contraction of the undesirables, which is able to depict a bank’s true production activities. We find that the banks have a lower technical inefficiency with the preferred model compared to the other models. Before 2002, the technical inefficiency exhibits a gradual upward trend and then posts a downward trend during the FFR period, due to enhanced banking and benefits obtained from compliance with FFR. The inefficiency scores deteriorate sharply, during the “credit card and cash card crisis” in 2006 and “the subprime mortgage crisis” in 2008. Public and financial holding company (FHC) banks are respectively more efficient than private and non-FHC banks.

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  • Huang, Tai-Hsin & Chung, Ming-Tai, 2017. "Do undesirables matter on the examination of banking efficiency using stochastic directional distance functions," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 194-211.
    • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:194-211
    DOI: 10.1016/j.qref.2016.09.007
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    Cited by:

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    2. Gulati, Rachita, 2022. "Global and local banking crises and risk-adjusted efficiency of Indian banks: Are the impacts really perspective-dependent?," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 23-39.

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    More about this item

    Keywords

    Technical efficiency; Directional technology distance function; Undesirable outputs; Public banks; Private banks; Financial holding company;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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