Credit risk and efficiency in the European banking system: A three-stage analysis

Abstract

Increased competition and the attempts of European banks to increase their presence in other markets may have affected the efficiency and credit risk in the banking system. The first aspect is the incentive in reducing costs in order to gain in competitiveness. The second is associated with their lack of knowledge of such markets and/ or acceptance of a higher risk in order to increase their market share. Despite the importance of these aspects, banking literature has usually analysed the effects of competition on the efficiency of banking systems without considering these aspects. The few studies that attempt to obtain risk adjusted efficiency measures do not consider that part of the risk is due to exogeneous circumstances. This article proposes a new three-stage sequential technique, based on the DEA model and on the decomposition of risk into its internal and external components, for obtaining efficiency measures adjusted for risk and environment. It is seen that the technique allows the use of any existing technique of incorporation of environmental variables in DEA analysis.

Efficiency, endogenous and exogenous credit risk in the banking systems of the Euro area

“…1 See Berg et al (1993 and1995), Bergendhal (1995), Fecher and Pestieau (1993), Pastor et al (1995Pastor et al ( , 1997aPastor et al ( , 1997bPastor et al ( and 1999b, Allen and Rai (1996) and Maudos et al (2000). For an excellent survey about efficiency of the financial institutions see Berger and Humphrey (1997).…”

“…Only Pastor (1999b) analyses the possible consequences of the Euro-driven opening-up to new markets on the efficiency and credit risk of the banking systems of the Euro area.…”

“…For an excellent survey about efficiency of the financial institutions see Berger and Humphrey (1997). 2 Thus Maudos et al (2000) consider specialisation clusters to isolate for the effect of specialisation, Pastor (1999b) and Pastor et al (1997b) develop techniques that isolate for the effect of environmental variables.…”

Assessing efficiency profiles of UK commercial banks: a DEA analysis with regression-based feedback

“…With respect to the type of assessment perspective, which drives the choices of inputs and outputs, we classify the literature into six categories; namely, the intermediation approach or perspective (e.g., Rangan et al 1988;Ferrier and Lovell 1990;Charnes et al 1990;Mehdian 1990, 1992;Aly et al 1990;Yue 1992;Grabowski et al 1993;Fukuyama 1993;Zaim 1995;Favero and Papi 1995;Miller and Noulas 1996;Taylor et al 1997;Chen 1998;Drake et al 2006;Liu 2018), the asset approach (e.g., Favero and Papi 1995), the production approach (e.g., Drake et al 2006;Liu and Tone 2008), the value added approach (e.g., Bhattacharyya et al 1997;Pastor et al 1997;Chu and Lim 1998;Pastor 2002;Das and Ghosh 2006), the profit-oriented approach (e.g., Berger and Mester 2003;Drake et al 2006;Liu and Tone 2008), and the user cost approach (e.g., Hancock 1985a, b;Fixler and Zieschang 1992).…”

“…The first category consists of single country focused studies and covers US Banks (Rangan et al 1988;Ferrier and Lovell 1990;Mehdian 1990, 1992;Aly et al 1990;Yue 1992;Miller and Noulas 1996;Kwon and Lee 2015), UK Banks (Drake 2001;Webb 2003;Webb et al 2010;Tanna et al 2011), Italian Banks (Favero and Papi 1995), Turkish Banks (Zaim 1995;Kutlar et al 2017), Japanese Banks (Fukuyama 1993;Liu and Tone 2008), Taiwanese Banks (Chen 1998;Liu 2018), Hong Kong Banks (Drake et al 2006), Singaporean Banks (Chu and Lim 1998), Indian Banks (Bhattacharyya et al 1997), Mozambique Banks (Wanke et al 2016), and Korean Banks (Lee et al 2017). The second category consists of multi-country focused studies and covers banks in several countries such as US, Australian, New Zealand, Austrian, Spanish, German, UK, Italian, Belgian, French, Danish, Luxembourg, Dutch, and Portuguese Banks (e.g., Pastor et al 1997;Pastor 2002;Lozano-Vivas et al 2002;Casu and Molyneux 2003;Pasiouras 2008;Avkiran 2009). …”