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Decomposing banking performance into economic and risk management efficiencies

Author

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  • Jean-Philippe Boussemart

    (University of Lille 3 and IÉSEG School of Management (LEM 9221-CNRS))

  • Hervé Leleu

    (CNRS-LEM 9221 and IÉSEG School of Management)

  • Zhiyang Shen

    (Eximbank, Anhui University of Finance and Economics)

  • Michael Vardanyan

    (IÉSEG School of Management (LEM-CNRS - UMR 9221))

  • Ning Zhu

    (South China University of Technology, School of Economics and Commerce)

Abstract

This paper proposes a novel non-parametric approach of a banking production technology that decomposes performance into economic and risk management efficiencies. The basis of our approach is to separate the production technology into two sub-technologies. The former is the production of non-interest income and loans from a set of traditional inputs. The latter is attached to the production of interest income from loans where an explicit distinction between good and non-performing loans is introduced. Economic efficiency comes from the production of good outputs, namely interest and non-interest income, while risk-management efficiency is related to the minimization of the non-performing loans that can be considered as an unintended or bad output. The model is applied to Chinese financial data covering 30 banks from 2005 to 2012 and different scenarios are considered. The results indicate that income could be increased by an average rate of 16% while non-performing loans could be decreased by an average rate of 33%. According to our results, banking managers could strike a balance between economic performance and risk-management and make more appropriate decisions in line with their preferences.

Suggested Citation

  • Jean-Philippe Boussemart & Hervé Leleu & Zhiyang Shen & Michael Vardanyan & Ning Zhu, 2017. "Decomposing banking performance into economic and risk management efficiencies," Working Papers 2017-EQM-09, IESEG School of Management.
  • Handle: RePEc:ies:wpaper:e201709
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    Cited by:

    1. Ferreira, Cândida, 2021. "Efficiency of European Banks in the Aftermath of the Financial Crisis: A Panel Stochastic Frontier Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 36(1), pages 103-124.

    More about this item

    Keywords

    Data Envelopment Analysis; Risk management; Economic efficiency; Banking performance; Non-performing loans;
    All these keywords.

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