Disentangling the sources of bank inefficiency: a two-stage network multi-directional efficiency analysis approach

Abstract

To disentangle the sources of bank inefficiency, this paper presents an extended two-stage network multi-directional efficiency analysis (NMEA) approach by taking the internal structure of the banking system into account. The proposed two-stage NMEA approach extends the conventional “black-box” MEA approach, providing a unique efficiency decomposition and identifying which variables drive the inefficiency for banking systems with a two-stage network structure. An empirical application of Chinese listed banks from 2016 to 2020 during the 13th Five-year Plan reveals that the overall inefficiency of sample banks is primarily sourced from the deposit-generating subsystem. Additionally, different types of banks display differentiated evolution modes over different dimensions, confirming the importance of applying the proposed two-stage NMEA approach.

A New Resource Allocation Multiple Criteria Decision-Making Method in a Two-Stage Inverse Data Envelopment Analysis Framework for the Sustainable Development of Chinese Commercial Banks

“…However, most of the research has the following limitations: First, the internal structure of decision-making units (DMUs) is often overlooked; second, undesirable outputs often cannot be considered. Wang et al (2014) claimed that the Chinese commercial banking system has a two-stage internal structure [21]; Azad et al (2021) [22], Tan et al (2021) [23], and Yang et al (2023) [24] all emphasized that it is necessary to consider the internal system structure of banks when evaluating their efficiency; otherwise, the accuracy of commercial bank efficiency evaluation would be affected. Safiullah and Shamsuddin (2022) [25], Shah et al (2022) [26], and Wanke et al (2023) [27] all claimed that nonperforming loans should be considered undesirable outputs in the efficiency evaluation of commercial banking because they represent the risks of commercial banking and hinder its sustainable development.…”