Estimation and Determinants of Chinese Banks’ Total Factor Efficiency: A New Vision Based on Unbalanced Development of Chinese Banks and Their Overall Risk

IRTG 1792 Discussion Paper 2020-001

23 Pages Posted: 25 Aug 2020

See all articles by Shiyi Chen

Shiyi Chen

Fudan University - School of Economics

Wolfgang K. Härdle

Blockchain Research Center; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Charles University; National Yang Ming Chiao Tung University; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Li Wang

East China Normal University (ECNU)

Date Written: January 2, 2020

Abstract

The paper estimates banks’ total factor efficiency (TFE) as well as TFE of each production factor by incorporating banks’ overall risk endogenously into bank’s production process as undesirable by-product in a Global-SMB Model. Our results show that, compared with a model incorporated with banks’ overall risk, a model considering only on-balance-sheet risk may over-estimate the integrated TFE (TFIE) and under-estimate TFE volatility. Significant heterogeneities of bank TFIE and TFE of each production factor exist among banks of different types and regions, as a result of still prominent unbalanced development of Chinese commercial banks. Based on the estimated TFIE, the paper further investigates the determinants of bank efficiency, and finds that shadow banking, bank size, NPL ratio, loan to deposit ratio, fiscal surplus to GDP ratio and banking sector concentration are significant determinants of bank efficiency. Besides, a model with risk-weighted assets as undesirable outputs can better capture the impact of shadow banking involvement.

Keywords: Nonparametric Methods, Commercial Banks, Shadow Bank, Financial Risk

JEL Classification: C00

Suggested Citation

Chen, Shiyi and Härdle, Wolfgang K. and Wang, Li, Estimation and Determinants of Chinese Banks’ Total Factor Efficiency: A New Vision Based on Unbalanced Development of Chinese Banks and Their Overall Risk (January 2, 2020). IRTG 1792 Discussion Paper 2020-001, Available at SSRN: https://ssrn.com/abstract=3656331 or http://dx.doi.org/10.2139/ssrn.3656331

Shiyi Chen

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Wolfgang K. Härdle

Blockchain Research Center ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Li Wang (Contact Author)

East China Normal University (ECNU) ( email )

North Zhongshan Road Campus
3663 N. Zhongshan Rd.
Shanghai, 200062
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
13
Abstract Views
177
PlumX Metrics