The Impact of Risk on Banks’ Technical and Scale Efficiency: Empirical Evidence from the Chinese Banking Sector

By employing the Data Envelopment Analysis (DEA) method, this paper attempts to examine the impact of risks on Chinese banks’ technical and scale efficiency estimates. To do so, it follows the procedures set by Drake and Hall (2003) to include risk factor as a non-discretionary input variable. The empirical findings suggest that scale inefficiency has greater influence than pure technical inefficiency in determining the Chinese banking sector’s total technical efficiency. The results suggest that potential economies of scale are overestimated in the range of 22% to 30% when the risk factor is excluded. Moreover, the inclusion of risk factor benefits the city commercial banks the most, and the joint-stock commercial banks the least.