The effects of efficiency on banks’ market risk: Empirical evidence from China

Abstract

This article investigates the effect of efficiencies on market risk using a sample of Chinese commercial banks from 2000 to 2015 using different measures of market risk; the Value at Risk (VaR) and Expected Shortfall (ES). The cost and profit efficiencies are estimated by the Stochastic Frontier Analysis (SFA) on the 12 biggest banks listed on the Shanghai Stock Exchange. In testing the effect between efficiency and market risk, this study applied four different models to uncover the relationship between VaR and ES as measures of market risk on cost and profit efficiencies. Utilising a panel data analysis, the results show that different banks efficiencies affect market risk measures differently. While bank cost efficiency reduces market risk, increase in profit efficiency increase market risk. The analysis in this study helps explain the unconvincing evidence of an inefficiencies-risk connection in the bank sector. Bank regulators and managers may need to focus on the cost and profit efficiencies-related initiatives to better manage the market risk. These findings provide bank managers with more understanding of bank risk and serve as an underpinning for bank supervision efforts aimed at strengthening the joint risk management of efficiency market risks.

Technical Efficiency of Bank Liquidity Creation For Malaysian Commercial Banks From 2011 to 2018

“…Studies on the effects of crisis on the Malaysian commercial banks by Majid et al (2003); Hisham (2003) reveal that there is no significant difference on the level of commercial banks' technical efficiency before and after the crisis. Among the studies that focus on the relationship between efficiency level and banking competition such as by Rahim (2016) suggests that Malaysian commercial banks experienced increased concentration rate with lower competition level and competition has a positive effect on technical efficiency. Studies that investigate the relationship between bank efficiency and competition such as by Rahim (2017) investigated the performance of Malaysian commercial banks in the context of the increasing presence of foreign banks.…”