Evaluation of bank efficiency by considering the uncertainty of nonperforming loans

Abstract

Research of banking operations has recently attracted increasing interest among bank managers and scholars, especially research on the evaluation of bank efficiency. As a prominent factor, nonperforming loans are always considered when measuring bank efficiency. Actually, the complex structures and uncertainty of non-performing loans have been neglected in previous studies. In our study, a new robust two-stage DEA (data envelopment analysis) model is proposed to analyze bank efficiency while considering the structure and uncertainty of nonperforming loans. The proposed model was utilized to assess Chinese commercial banks’ performance. Results indicated traditional model may overestimate banks’ performances, which will mislead bank decision-makers seeking to implement improvement strategies. Moreover, the majority of banks performed better in producing deposits compared with earning profits. Lastly, gaps between small medium banks and state-owned banks are still larger when considering the structure and uncertainty of nonperforming loans. Specific recommendations are proposed for each type of bank.