The transnational comparative study on the potential risks and efficiency of commercial banks based on the weight-limited DEA model

Abstract

Purpose

The purpose of this paper is to calculate the bank efficiency of removing potential risks that are hidden from the extreme portfolio of bank’s assets and further compare the differences and causes of bank’s efficiency and potential risk level between China’s representative banks and OECD representative banks in 2011-2015.

Design/methodology/approach

Based on the weight-limited DEA model, this paper calculates the bank’s efficiency and further compares the differences between China’s representative banks and OECD representative banks by using commercial banks’ transnational data.

Findings

By analyzing US representative banks’ data, the authors find that the excessive expansion of the scale of banks’ investment for the non-real economy shrinks after the bubble burst and would not improve the efficiency of banks immediately. The OECD representative banks rather prefer to extreme asset portfolio so that the potential risks gradually increase, while there is a diminishing effect on investments in non-real economies to improve bank efficiency. On the other hand, China’s representative banks have the signs of reducing investment in the real estate market, but the existence of the bubble in the market led to a lagged effect on the impact of adjustment of bank asset portfolio on efficiency.

Research limitations/implications

This paper has practical significance for commercial banks to improve efficiency and reduce credit risks. This is conducive to the implementation of targeted supervision by the banking supervision department.

Practical implications

Based on the lesson that the financial crisis created by the real estate bubble burst in the USA in 2008 and the financial market active guidance of the developed economies, faced with the reality of Chinese real estate market bubble rising and the continuous improvement of Chinese financial market, this paper compares the differences between representative banks in China and OECD, and explores the causes by using the cross-country data of commercial banks.

Originality/value

By adjusting the weight of the input variables in the efficiency measurement, quantifying the risk is often overlooked by the changes in bank efficiency. This potential risk is caused by the bank’s investment preferences in the non-real economy represented by real estate and tradable financial assets.

Citation

Wang, H., Wang, Y., Zhao, S., Wang, L.-p. and An, H. (2018), "The transnational comparative study on the potential risks and efficiency of commercial banks based on the weight-limited DEA model", China Finance Review International, Vol. 8 No. 4, pp. 441-452. https://doi.org/10.1108/CFRI-06-2017-0126