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Credit risk shocks and banking efficiency: a study based on a bootstrap-DEA model with nonperforming loans as bad output

Author

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  • Renyu Li
  • Li Li
  • Peijiang Zou

Abstract

Purpose - This paper investigates the impact of credit risk shocks on the evolution of banking efficiency in China. Design/methodology/approach - This paper introduces credit risk as a bad output into a bootstrap data envelopment analysis (bootstrap-DEA) model. Findings - During a credit risk shock, the efficiency levels of both state-owned commercial banks and joint-stock commercial banks are significantly higher than those of urban/rural commercial banks, and the efficiency differences between these banks further increase during a period of economic slowdown. This paper also finds that the efficiencies of joint-stock commercial banks are the most sensitive to credit risk shocks; these banks are the first to be affected and the first to completely adjust. However, urban/rural commercial banks adjust very slowly. Originality/value - Most scholars still use the traditional DEA method to estimate China's banking efficiency. The bootstrap-DEA method is clearly able to obtain a more exact estimated efficiency score. In fact, in comparison with the bootstrap-DEA model, we found that the traditional DEA method overestimates China's banking efficiency, and this is an especially serious problem for those banks that have a high efficiency score.

Suggested Citation

  • Renyu Li & Li Li & Peijiang Zou, 2020. "Credit risk shocks and banking efficiency: a study based on a bootstrap-DEA model with nonperforming loans as bad output," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 48(1), pages 1-19, April.
    • Handle: RePEc:eme:jespps:jes-08-2019-0395
    DOI: 10.1108/JES-08-2019-0395
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    Citations

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    Cited by:

    1. Ying Li & Yung‐ho Chiu & Ying Yu Chen & Lihua Wang & Yi‐Nuo Lin & Su‐Wan Wang, 2022. "The impact of market share on efficiency of commercial banks: Resampling slacks‐based measure data envelopment analyses model," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1621-1634, July.

    More about this item

    Keywords

    Banking efficiency; Nonperforming loans; Bad output; Bootstrap-DEA; C69; G21; G31;
    All these keywords.

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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