Title: The impact of risk on technical and scale efficiency: empirical evidence from the China banking sector

Authors: Fadzlan Sufian

Addresses: Khazanah Research and Investment Strategy, Khazanah Nasional Berhad, Level 35, Tower 2, Petronas Twin Towers, Kuala Lumpur City Centre, 50088 Kuala Lumpur, Malaysia; Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, Malaysia

Abstract: By employing the data envelopment analysis (DEA) method, this paper examines the impact of risks on China banks| technical and scale efficiency estimates. To do so, we follow the procedures set out by Drake and Hall (2003) to include risk factor as a non-discretionary input variable. The results indicate that scale inefficiency outweighs pure technical inefficiency in determining the China banking sector|s technical efficiency during the earlier years, while the opposite is true during the latter years. The empirical findings suggest that potential economies of scale to be overestimated in the range of 10% to 22.5% when risk factor is excluded. The inclusion of risk factor has benefited the city commercial banks the most, while the joint stock commercial banks the least. The findings from the multivariate regression analysis indicate that technically efficient banks are larger, relatively better capitalised, have smaller market share and on average have lower amount non-performing loans.

Keywords: banking risks; technical efficiency; risk; data envelopment analysis; Malmquist DEA; panel regression analysis; China; scale inefficiency; non-discretionary input variables; Leigh Drake; Maximilian Hall; economies of scale; commercial banks; joint stock banks; multivariate regression analysis; capitalisation; market share; non-performing loans; business performance; performance management; scale efficiency.

DOI: 10.1504/IJBPM.2010.036041

International Journal of Business Performance Management, 2010 Vol.12 No.1, pp.37 - 71

Accepted: 29 Apr 2010
Published online: 13 Oct 2010 *

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