Abstract
The objective of the study was to measure the risk-adjusted efficiency of banks in 24 emerging economies for the period of 1999–2013. A two-stage network data envelopment analysis (DEA), with separate deposit mobilization and loan financing stages was used. Efficiency was measured using directional distance functions with DEA, featuring non-performing loans as undesirable outputs. The distributions of efficiency scores were different when credit quality was taken into account. The distribution of efficiency scores varied systematically with accumulation of non-performing loans across regions. The financial crisis of 2007–2008 impacted more adversely the regions that had higher proportions of non-performing loans in banks’ portfolios. The results of a follow-on non-parametric regression showed that smaller, better capitalized, and private banks were more efficient. The conditions conducive for high levels of technical efficiency by banks were found to be characterized by economic growth and low inflation.
Highlights
The financial system plays a vital role in the economic development of an economy
Directional distance function based on network data envelopment analysis (DEA)
The present study modeled banking operations as consisting of two stylized stages—the deposit mobilization stage, and the loan financing stage—and separately estimated technical efficiency at each stage
Summary
The financial system plays a vital role in the economic development of an economy. The banks, mobilize funds from a diverse set of savers to investors (Drigă and Dura 2014). Crisis in the banking sector could lead to broader macroeconomic instability (Baily and Elliott 2009) and adversely impact growth (Moyo et al 2014). Despite their crucial importance to the economy, banks are prone to agency problems that may induce some managers to take excessive risks (Acharya and Naqvi 2012), and potentially jeopardize bank solvency. 73% of the 171 failed banks in the United States for the period of 1979–1987 engaged in aggressive risk-taking (Office of the Comptroller of the Currency 1988)
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