Risk and Efficiency in East Asian Banks

38 Pages Posted: 20 Apr 2016

See all articles by Luc Laeven

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Date Written: December 1999

Abstract

Banks restructured after East Asia's crisis of 1997 - most of them family-owned or company-owned and almost never foreign-owned - tended to be heavy risk takers. Most of them had excessive credit growth.

Laeven uses a linear programming technique (data envelopment analysis) to estimate the inefficiencies of banks in Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand. He applies this technique to the precrisis period 1992-96.

Assessing a bank's overall performance requires assessing both efficiency and risk factors, so Laeven also introduces a measure of risk taking. This risk measure helps predict which banks were restructured after the crisis of 1997.

Laeven finds that foreign-owned banks took little risk relative to other banks in East Asia, and that family-owned and company-owned banks were among the highest risk takers.

Banks restructured after the 1997 crisis had excessive credit growth, were mostly family-owned or company-owned, and were almost never foreign-owned.

This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to study the causes and resolution of financial distress. The author may be contacted at llaeven@worldbank.org.

Suggested Citation

Laeven, Luc A., Risk and Efficiency in East Asian Banks (December 1999). Available at SSRN: https://ssrn.com/abstract=629192

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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