Risk, competition, efficiency and its interrelationships: evidence from the Chinese banking industry

Abstract

PurposeThis study investigates the interrelationships between efficiency, competition and risk in the Chinese banking industry.Design/methodology/approachParametric stochastic frontier analysis is used to estimate bank efficiency; the Lerner index is used as the competition indicator; accounting ratios and a translog function are used to measure different types of risk and finally, the three-stage least square estimator is used to investigate the interrelationships.FindingsThe results of this study show that the impact of competition on different types of risk is significant and positive, while there is a significant and positive impact of credit risk, liquidity risk and capital risk on bank competition. In addition, the findings demonstrate that the interrelationships between efficiency and competition are significant and negative. The authors do not find any robust interrelationships between different types of risk and different types of efficiency; the authors find that diversification and higher levels of profitability reduce bank credit risk. The results suggest that a higher developed banking sector reduces the level of bank competition in China.Originality/valueThis is the first piece of research that comprehensively investigates the interrelationships between different types of risk, competition and different efficiencies in China.

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“…As outlined by Irsova and Havranek (2011) and Dinutistomo and Lubis (2021), SFA offers distinct advantages over DEA (a non-parametric approach), particularly in handling statistical noise (random errors) by decomposing it into an inefficiency term and other stochastic shocks related to the distribution of the inefficiency component. Additionally, Tan et al (2021) notes that SFA is particularly suited for application in developing economies due to challenges related to measurement errors and uncertain economic environments. Cost efficiency is defined as the potential minimum cost and the actual cost, which lies above the minimum frontier, owing to inefficiency (Astuti and Saputra, 2019).…”