The nonparametric risk-adjusted efficiency measurement: An application to Taiwan's major rural financial intermediaries

In this article, a nonparametric approach is used to incorporate risk into the measurement of technical efficiencies of the major financial intermediaries in rural Taiwan. Risk is treated as a joint but undesirable output given the fact that various regulatory actions may prevent its free disposability. Three risk indicators (nonperforming loans, allowance for loan losses, and risky assets) are employed alternatively in the empirical work. Results suggest that all three risk constraints are binding. Regulations on controlling risky assets and loan loss reserves are effective but more burdensome than those on controlling loan quality.