Affecting factors on risk-adjusted efficiency in Taiwan's banking industry

This study adopts a two-stage approach, data envelopment analysis (DEA) and tobit regression, to investigate the bank efficiency index and efficiency effect incorporated into account credit and market risk. The authors use the DEA method in the first stage to estimate bank cost efficiency, and the tobit regression model in the second stage to estimate efficiency effects. The empirical results are summarized as follows: First, results indicate that risk factors impact bank efficiency. Banks with a higher degree of nonperforming loans or value at risk will see efficiency decrease by incorporating account risk. Second, there is no significant difference with the bank efficiency index taking only credit risk or market risk into consideration, but there are significant differences on the bank efficiency index in situations without risk or with credit and/or market risks. Finally, the study notes that different bank efficiency indexes calculated according to different risks are affected by different factors.