Measurement of Credit Risk Efficiency and Productivity Change for Commercial Banks in Taiwan

 

Kuan-Chung Chen

Assistant Professor of Department of Business Administration, TransWorld University

jack_acc@mail2000.com.tw

 

Che-Han Kao

Professor and Chairman of Department of Public Relations Design, TransWorld University

Retired Professor of Central Police University

cpu45@yahoo.com.tw

 

Abstract

Efficiency measurement is based on the fact that the operational risks are important factors affecting the productivity of a bank. Particularly, the credit risk management of the banks has serious impact on productivity. In this paper, we use financial ratios to assess credit risk of 34 Taiwanese commercial banks over the period 2005-08, and investigate the productivity change based on the factors of credit risk with the Malmquist productivity index (MPI) approach, which is calculated from efficiency scores based on data envelopment analysis (DEA). Our results indicate that the productivity on credit risk of seventeen banks has been improving over the evaluated periods while seventeen banks have been declining. And according to the credit risk efficiency scores and credit risk MPI (CR-MPI), we classify the 34 banks into four groups. We find that different groups of banks should have different strategies of credit risk management to survive in this changing environment.

 

Keywords: Credit risk; Financial ratios; Data envelopment analysis; Malmquist productivity index.