Abstract
Purpose The purpose of this paper is to incorporate risk in technical efficiency of ASEAN banks in a panel data framework for the period 2000 to 2015. Design/methodology/approach The directional distance function and semi-parametric framework are employed to estimate efficiency scores for two scenarios, one with only good outputs and the other with a combination of good and bad outputs. Findings The findings show there is no evidence of technological progress for banks in ASEAN and concerns about the outperformance of Vietnam’s banks. In addition, performance of Vietnam’s banks tends to be distorted by low level of loan loss reserves. Practical implications To reflect the true performance and shorten the period of removing bad assets, the State Bank of Vietnam can request banks in Vietnam to book more loan loss reserves. Originality/value By examining such a new approach, this study makes an early attempt to incorporate credit risk into the banking efficiency in ASEAN region.
Highlights
We try to incorporate risk into measuring technical efficiency of banking institutions in the Association of Southeast Asian Nations (ASEAN)[1] alliance
Our motivation commences from a gap that, in the literature searching of efficiency analysis in ASEAN banking sector, risk is ignored in examining efficiency in articles of Wong and Deng (1999), Karim (2001), Gardener et al (2011), Williams and Nguyen (2005), Sarifuddin et al (2015) and Chan et al (2015)
In this paper, risk is incorporated into efficiency measurement by directional distance function (DDF) and semi-parametric estimation of stochastic frontier models (SEMSFA)
Summary
We try to incorporate risk into measuring technical efficiency of banking institutions in the Association of Southeast Asian Nations (ASEAN)[1] alliance. Some included risk as an environmental variable or regarded it as exogenous in the analysis of efficiency effect, such as Khan (2014) and Yueh-Cheng Wu et al (2016). According to Laeven (1999), whereas loans are usually chosen as an output variable in the intermediation approach to modeling bank production, non-performing loans are chosen as a proxy for risk, and they regress efficiency scores followed by Journal of Asian Business and Economic Studies Vol 26 No 1, 2019 pp. Sarmientoa and Galán (2015) found out that cost and profit efficiency are over- and underestimated when risk measures are not accurately modeled
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