The Effects of Nonperforming Loans on Dynamic Network Bank Performance

Day-Yang Liu,Wen-Min Lu,Cheng-Hsien Lin,Ya-Chiang Wu

doi:10.1155/2017/9458315

Abstract

This paper is to explore the relationship between banks’ performance and their nonperforming loans (NPLs). The banks’ performance through a network production process structure with NPLs is developed. With increasing NPLs in recent years, the quality of lending assets is a key significant and influencing factor for banks’ operational risk. The research methodology is to integrate the radial and nonradial measures of efficiency into the network production process framework with NPLs; this study utilizes network epsilon-based measure model to evaluate the banking industry performance. In addition, the key characteristics of the bank industry including those of financial holding companies and privatized government banks are needed to be figured out and to provide insight into what causes imperfectly competitive conditions for some banks. The results demonstrate that the banking sector grew consistently in three aspects of operation: operating performance, profitability performance, and risk management in the last five years of the subject period. These results showed that the overall banking sector was capable of pursuing growth in both operations and profits while accounting for risk management. The potential applications and strengths of network data envelopment analysis in assessing financial organizations are also highlighted.

Highlights

The purpose of this study is motivated by the developments in the literature on the relationship between banks’ performance and financial stability and on the effort that is currently being made to improve nonperforming loans (NPLs) [1,2,3]
The study found that NPLs constituted one of the most influential factors affecting banks’ performances; the epsilon-based Internet data envelopment analysis was introduced into the study to explore banks’ operations, profit making, and risk management, resulting in the following findings
Banks that fell under the framework of financial control performed better than other banks and had performance metrics in profit making and risk management that were affected significantly

Summary

Introduction

The purpose of this study is motivated by the developments in the literature on the relationship between banks’ performance and financial stability and on the effort that is currently being made to improve nonperforming loans (NPLs) [1,2,3]. NPLs have been one of the most significant bank trends [4]. The World Bank indicated that when banks adopt NPLs as one of the performance indicators, their banks’ performance improves greatly. Banks reduce NPLs to enhance their operating performance and profitability performance [5] and to let their risk management become better [6]. Banks have realized that NPLs enhance the image of corporations and may create profits for them. NPLs play a significant role in banks’ performance, implying that NPLs are seen as an integral part of strategy

Objectives

Methods

Results

Conclusion