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Estimation and determinants of Chinese banks’ total factor efficiency: a new vision based on unbalanced development of Chinese banks and their overall risk

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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.

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Fig. 1

Data Source: the annual reports of CBRC (2006–2012), website: http://www.cbrc.gov.cn

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Data Source: Shao (2013)

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Data Source: the annual reports of CBRC (2003–2012), website: http://www.cbrc.gov.cn

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Acknowledgements

Shiyi Chen thanks the supports from National Science Fund for Distinguished Young Scholars (71525006), Cheung Kong Scholars Programme and Shanghai Leading Talent Project. Wolfgang K. Härdle thanks the supports from Deutsche Forschungsgesellschaft through the International Research Training Group 1792 “High Dimensional Nonstationary Time Series”, Czech Science Foundation(19-28231X) and YuShan Scholarship. Li Wang thanks the supports from National Natural Science Foundation (71603056), Humanities and Social Sciences Projects of Ministry of Education (16YJC790093), Shanghai Philosophy and Social Science Planning Project (2019BJB006) and Fundamental Research Funds for the Central Universities (2017ECNU-HLYT015). The authors bear all the responsibility for the article.

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Authors and Affiliations

  1. School of Economics, Fanhai International School of Finance, Fudan University, Shanghai, China

    Shiyi Chen

  2. C.A.S.E. - Center for Applied Statistics and Economics, Humboldt-Universität zu Berlin, Spandauer Str. 1, 10178, Berlin, Germany

    Wolfgang K. Härdle

  3. Sim Kee Boon Institute for Financial Economics, Singapore Management University, 81 Victoria Street, Singapore, 188065, Singapore

    Wolfgang K. Härdle

  4. Department of Mathematics and Physics, Charles University, Ke Karlovu 2027/3, 12116 Praha 2, Prague, Czech Republic

    Wolfgang K. Härdle

  5. Faculty of Economics and Management, East China Normal University, Shanghai, China

    Li Wang

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Correspondence to Li Wang.

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Chen, S., Härdle, W.K. & Wang, L. Estimation and determinants of Chinese banks’ total factor efficiency: a new vision based on unbalanced development of Chinese banks and their overall risk. Comput Stat 35, 427–468 (2020). https://doi.org/10.1007/s00180-019-00951-6

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