Deregulation, financial crisis, and bank efficiency in Taiwan: an estimation of undesirable outputs

Abstract

Purpose - This study investigates the undesirable impacts of outputs on bank efficiency and contributes to the literature by assessing how regulation policies and other events impact bank efficiency in Taiwan in regards to deregulation, financial crisis, and financial reform from 1993 to 2011. Methodology- In order to effectively deal with both undesirable and desirable outputs, this study follows Seiford and Zhu (2002), who recommend using the standard data envelopment analysis model to measure performance by increasing the desirable outputs and decreasing the undesirables. Findings - Empirical findings indicate that bank efficiency with undesirable outputs is more prevalent than bank efficiency without undesirable outputs, which implies that undesirable outputs play a key role in hampering bank efficiency. This study result show that the effect of deregulation on bank efficiency decreased during the initial financial reform period. Nevertheless, our empirical evidence shows that financial reform significantly improved bank efficiency in emerging countries in the long run. Conclusion- First, in accounting for both desirable and undesirable output while evaluating and analyzing bank efficiency, it assumes that undesirable outputs operate as non-performing loans and offers a comparison of different results from perspectives that either consider undesirable output within the classical DEA model or do not. The second contribution stems from the fact that the processes of rapid growth and recovery in recent years have given emerging Asian countries undoubtedly key roles in world economics, and studies have responded by analysing data of emerging Asian countries, such as Taiwan. Thirdly, this study contributes to the literature by assessing how regulation policies and other events impact bank efficiency in Taiwan in regards to deregulation, financial crisis, and financial reform.