Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2020 001

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

Shiyi Chen
Wolfgang K. Härdle
Li Wang

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.

Nonparametric Methods, Commercial Banks, Shadow Bank, Financial Risk

JEL Classification: