The Analysis of Taiwanese Bank Efficiency: Incorporating both External Risk and Internal Risk

In this study, we adopt a three-stage approach, DEA method, Frontier regressions, and DEA method to estimate bank efficiency based on information obtained from 29 banks in Taiwan for the period from 2002 to 2004. In the first stage, we employ super SBM (super Slacks-Based Measure) to estimate the scores relating bank efficiency including internal risk. In the second stage, a stochastic frontier regression model is then employed to estimate the external environment risk effects. In the third stage, we employ DEA method again to estimate the scores relating bank efficiency including the internal risk and excluding the external risk. Our empirical results from the three-stage approach are summarized as follows: (1) The mean efficiency score of public-owned banks is higher than that in mixed banks, and private-owned banks under the first and three stage (2) The performance of banks incorporating internal risk is superior than incorporating both internal and external risk. (3) Incorporating external risk has no effect on the efficiency of public banks, but has the most significant effect on the efficiency of private banks.