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Efficiency and risk management in Spanish banking: a method to decompose risk

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  • Jose Pastor

Abstract

The single market programme has substantially increased the level of competition in the Spanish Banking System (SBS). This greater competition, though driving firms to improve their efficiency, may also encourage them to orient their businesses towards activities, sectors, and/or clients of higher risk. However, in spite of the importance of jointly evaluating efficiency and risk, the traditional measurements of efficiency do not take risk into account. Furthermore, the few studies that attempt to include risk do not separate the part of risk that is due to poor management (internal) from that which originates in the economic environment (external). This article proposes a new sequential DEA procedure to break down the main indicator of banking risk provision for loan losses (PLL)— into internal and external components, in order subsequently to obtain measurements of efficiency adjusted for risk. The analysis is illustrated by application to the SBS where deregulation, imposed by the Single Market Programme of the European Community, has affected banks conduct in terms of efficiency and risk.

Suggested Citation

  • Jose Pastor, 1999. "Efficiency and risk management in Spanish banking: a method to decompose risk," Applied Financial Economics, Taylor & Francis Journals, vol. 9(4), pages 371-384.
  • Handle: RePEc:taf:apfiec:v:9:y:1999:i:4:p:371-384
    DOI: 10.1080/096031099332267
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    References listed on IDEAS

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    1. Ana Lozano Vivas & Jesús Tadeo Pastor Ciurana & José Manuel Pastor Monsálvez, 1997. "Efficiency of European banking systems: A correction by environment variables," Working Papers. Serie EC 1997-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    3. Loretta J. Mester, "undated". "Efficiency of Banks in the Third Federal Reserve District," Rodney L. White Center for Financial Research Working Papers 2-94, Wharton School Rodney L. White Center for Financial Research.
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    1. Kenjegalieva, Karligash & Simper, Richard & Weyman-Jones, Tom & Zelenyuk, Valentin, 2009. "Comparative analysis of banking production frameworks in eastern european financial markets," European Journal of Operational Research, Elsevier, vol. 198(1), pages 326-340, October.
    2. Muliaman D. Hadad & Maximilian J. B. Hall & Wimboh Santoso & Karligash Kenjegalieva & Richard Simper, 2010. "Productivity Changes and Risk Management in Indonesian Banking: An Application of a New Approach to Constructing Malmquist Indices," Discussion Paper Series 2010_04, Department of Economics, Loughborough University, revised Feb 2010.
    3. Chiu, Yung-Ho & Chen, Yu-Chuan, 2009. "The analysis of Taiwanese bank efficiency: Incorporating both external environment risk and internal risk," Economic Modelling, Elsevier, vol. 26(2), pages 456-463, March.
    4. Walter Briec & Kristiaan Kerstens & Jean Baptiste Lesourd, 2001. "Single Period Markowitz Portfolio Selection, Performance Gading and Duality: A Variation on Luenberger'a Shortage Function," Working Papers 0203, Departament Empresa, Universitat Autònoma de Barcelona, revised Apr 2002.
    5. Azofra, Valentín & Santamaría, Marcos, 2011. "Ownership, control, and pyramids in Spanish commercial banks," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1464-1476, June.
    6. Bernardo Maggi & Marco Guida, 2011. "Modelling non-performing loans probability in the commercial banking system: efficiency and effectiveness related to credit risk in Italy," Empirical Economics, Springer, vol. 41(2), pages 269-291, October.
    7. Yao, Shujie & Han, Zhongwei & Feng, Genfu, 2008. "Ownership Reform, Foreign Competition, and Efficiency of Chinese Commercial Banks: A Non-Parametric Approach," WIDER Working Paper Series 038, World Institute for Development Economic Research (UNU-WIDER).
    8. Maudos, Joaquin & Pastor, Jose M. & Perez, Francisco & Quesada, Javier, 2002. "Cost and profit efficiency in European banks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 33-58, February.
    9. Thierno Amadou Barry & Santos José O. Dacanay & Laetitia Lepetit & Amine Tarazi, 2008. "Ownership Structure and Bank Efficiency in the asia pacific region," Working Papers hal-00915134, HAL.
    10. Gutiérrez-Nieto, Begoña & Serrano-Cinca, Carlos & Mar Molinero, Cecilio, 2007. "Microfinance institutions and efficiency," Omega, Elsevier, vol. 35(2), pages 131-142, April.
    11. Kenjegalieva, Karligash A. & Simper, Richard, 2011. "A productivity analysis of Central and Eastern European banking taking into account risk decomposition and environmental variables," Research in International Business and Finance, Elsevier, vol. 25(1), pages 26-38, January.
    12. Fethi, Meryem Duygun & Pasiouras, Fotios, 2010. "Assessing bank efficiency and performance with operational research and artificial intelligence techniques: A survey," European Journal of Operational Research, Elsevier, vol. 204(2), pages 189-198, July.
    13. Andreas Wutz, 2002. "Wie beeinflusst das Umfeld einer Bank die Effizienz? - Eine DEA-Analyse fuer die Bayerischen Genossenschaftsbanken," Discussion Paper Series 215, Universitaet Augsburg, Institute for Economics.
    14. repec:pal:jorsoc:v:60:y:2009:i:1:d:10.1057_palgrave.jors.2602527 is not listed on IDEAS
    15. Paola Dongili, 2005. "La definizione del prodotto delle banche," Working Papers 21/2005, University of Verona, Department of Economics.
    16. Jose Pastor & Lorenzo Serrano, 2005. "Efficiency, endogenous and exogenous credit risk in the banking systems of the Euro area," Applied Financial Economics, Taylor & Francis Journals, vol. 15(9), pages 631-649.
    17. Shujie Yao & Zhongwei Han & Genfu Feng, 2008. "Ownership Reform, Foreign Competition and Efficiency of Chinese Commercial Banks: A Non-parametric Approach," The World Economy, Wiley Blackwell, vol. 31(10), pages 1310-1326, October.
    18. Karligash Kenjegalieva & Richard Simper, 2010. "A Productivity analysis of Eastern European banking taking into account risk decomposition and environmental variables," Discussion Paper Series 2010_02, Department of Economics, Loughborough University, revised Jan 2010.
    19. López-Torres, Laura & Prior, Diego, 2013. "Do Parents Perceive The Technical Quality Of Public Schools? An Activity Analysis Approach," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 13(3), pages 39-60.
    20. Chiu, Yung-ho & Luo, Zhengying & Chen, Yu-Chuan & Wang, Zebin & Tsai, Min-Pei, 2013. "A comparison of operating performance management between Taiwan banks and foreign banks based on the Meta-Hybrid DEA model," Economic Modelling, Elsevier, vol. 33(C), pages 433-439.
    21. Hou, Xiaohui & Wang, Qing & Zhang, Qi, 2014. "Market structure, risk taking, and the efficiency of Chinese commercial banks," Emerging Markets Review, Elsevier, vol. 20(C), pages 75-88.
    22. Shen, Chung-Hua & Chen, Ting-Hsuan, 2010. "Estimating banking cost efficiency with the consideration of cost management," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 424-435, November.

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