Computing nonperforming loan prices in banking efficiency analysis

Abstract Within the framework of banking efficiency analysis, we propose a methodology for computing unobservable shadow prices nonperforming loans ( NPL ). Our approach is to include as an undesirable output variable in distance function stochastic frontier analysis. We conduct panel study US and European banks during most recent financial crisis by adopting semi-nonparametric Fourier specification, which ensures convergence true values both estimated related efficiency. Computing has several advantages, such identifying approaching crises, quantifying responsibilities governments credit risk determining appropriate regulatory interventions.