Alternative risk measurement for the banking system and its nexus with economic growth

Abstract

Scientific and reasonable evaluation of bank performance can help them conduct business management and decision-making, while most research ignore using the shadow price of undesirable outputs to evaluate banking performance. This study introduces a dual formulation of network data envelopment analysis to evaluate the shadow price of non-performing loans, which could be regarded as a novel measure of potential financial risk. We further investigate the tradeoff between economic growth and financial risk from micro and macro perspectives. Our results show that the financial risk of city commercial banks and joint-stock banks is higher than that of the big four state-owned and policy banks. Our research proves that economic growth influences the risk levels of banks directly and indirectly. More specifically, our study confirms that economic growth can reduce the bank's risk by reducing the bank's loan capital ratio as an intermediary path, that an increase in the capital adequacy ratio has a positive effect on the bank's risk.