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Do non-performing loans impact bank efficiency?

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  • Phung, Quang Thanh
  • Van Vu, Huong
  • Tran, Huy Phuoc

Abstract

This paper examines the impact of non-performing loans on bank efficiency and the mitigating effect of bank capitalisation. By employing U.S. commercial banks data from 1994 to 2018, we adopt an advance Data Envelopment Analysis (DEA) method to estimate bank efficiency and find a negative relationship between non-performing loans and bank efficiency. Banks holding a stronger capitalisation or belonging to the banking group could reduce the impact of non-performing loans on bank efficiency. It is suggested that the banking business group could help banks to increase efficiency via its internal capital market.

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  • Phung, Quang Thanh & Van Vu, Huong & Tran, Huy Phuoc, 2022. "Do non-performing loans impact bank efficiency?," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321003937
    DOI: 10.1016/j.frl.2021.102393
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    Cited by:

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    2. Maria Celia López-Penabad & Ana Iglesias-Casal & José Fernando Silva Neto & José Manuel Maside-Sanfiz, 2023. "Does corporate social performance improve bank efficiency? Evidence from European banks," Review of Managerial Science, Springer, vol. 17(4), pages 1399-1437, May.
    3. Megha Jaiwani & Ritika Chopra & Seema Bhardwaj & Santosh Gopalkrishnan, 2026. "A Systematic Review and Bibliometric Analysis of Asset Reconstruction Companies: A Panacea or A Plight for Non-Performing Assets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 33(1), pages 1-24, March.
    4. 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).
    5. Jiajia, Liu & Kun, Guo & Fangcheng, Tang & Yahan, Wang & Shouyang, Wang, 2023. "The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 105-119.
    6. Hiba Yousif Taha & Husam Abbas Ali, 2026. "The problem of non-performing loans in Iraqi banks: An econometric study of the impact of economic and institutional factors on asset quality," International Journal of Business and Management (IJBM), International Emerging Scholars Society (IESS), New Zealand, vol. 5(1), pages 35-49, January.
    7. Chen, Jing & Kamarudin, Fakarudin & Amin Noordin, Bany Ariffin & Theng, Lau Wei & Zhou, Tim, 2025. "Impact of shadow banking on Chinese banks’ efficiency: The moderating effect of ownership," Finance Research Letters, Elsevier, vol. 83(C).
    8. Yun Tu & Bin Sheng & Chien-Heng Tu & Yung-ho Chiu, 2025. "Evaluating Bank Efficiency with Risk Management by Optimal Common Resource and Three-Parallel Two-Stage Dynamic DEA Model," Computational Economics, Springer;Society for Computational Economics, vol. 65(6), pages 3545-3571, June.
    9. Duan, Yuejiao & Fan, Xiaoyun & Wang, Zijun, 2025. "Text readability of regulatory policies and bank profit efficiency," Research in International Business and Finance, Elsevier, vol. 80(C).
    10. Donald Amuah & Chibuzo Amadi & Brian Telford & Inalegwu Ode-Ichakpa, 2026. "Capital, liquidity, and bank performance after the global financial crisis: evidence from the ‘big four’ retail banks in the UK," Journal of Banking Regulation, Palgrave Macmillan, vol. 27(1), pages 1-25, March.

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    Keywords

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    JEL classification:

    • 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
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models

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