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Investigating the Performance of Chinese Banks: Efficiency and Risk Features pp 105–128Cite as

Palgrave Macmillan

The Measurement of Bank Efficiency and Bank Risk in China

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Abstract

This chapter will mainly deal with the measurements of bank efficiency and bank risk in China. With regard to the estimation of bank efficiency, the technical, pure technical and scale efficiencies of Chinese commercial banks will be evaluated using the non-parametric Data Envelopment Analysis, while the stochastic frontier approach will be used to estimate the cost, revenue and profit efficiencies of Chinese commercial banks. The measurement of different types of risk by the Chinese commercial banks will also be explained in this chapter, and finally, the chapter will discuss the modelling framework in order to investigate the relationship between risk and efficiency in the Chinese banking industry.

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Notes

  1. 1.

    Technical efficiency is estimated using four outputs (total loans, securities, total deposits and non-interest income) and three inputs (total cost which includes interest expenses and non-interest expenses, price of funds and price of capital).

  2. 2.

    The non-interest expenses include the price of labour.

  3. 3.

    The Z-score reflects the extent to which banks have the ability to absorb the losses. Thus, higher value of Z-score indicates lower risk and greater stability. The Z-score has been widely used to measure the stability of financial institutions by the empirical studies (see Hesse and Cihak, 2007; Iannotta et al. 2007; Beck et al. 2009; Liu and Wilson 2013, Liu et al., 2013). The calculation of Z-score can be expressed as follows:

    \( Z=\frac{ROA+E}{\sigma (ROA)} \)

    where ROA is banks’ Return on Assets, E/A is the ratio of equity over total assets, σ(ROA) is the standard deviation of Return on Assets.

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Authors and Affiliations

  1. University of Huddersfield Business School, Huddersfield, UK

    Yong Tan

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Tan, Y. (2016). The Measurement of Bank Efficiency and Bank Risk in China. In: Investigating the Performance of Chinese Banks: Efficiency and Risk Features. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-49376-7_5

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  • DOI: https://doi.org/10.1057/978-1-137-49376-7_5

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