On Modelling Non-Performing Loans in Bank Efficiency Analysis

Giannis Karagiannis, Stavros Kourtzidis (Lead / Corresponding author)

Research output: Contribution to journalArticlepeer-review

Abstract

This paper introduces a methodological framework for the examination of non-performing loans as reverse outputs under the extended strong disposability assumption, which does not require non-performing loans to be jointly produced with net loans, as it is implied when they are modeled as undesirable outputs. A directional distance function model with reverse outputs is used and is compared to the models that treat non-performing loans as an undesirable output under the weak disposability and the constrained weak disposability assumptions with uniform and non-uniform abatement factors. The model is applied at the case of European banks and for the sample to be representative the banks are chosen based on the European Banking Authority (EBA) stress test of 2021. The results indicate that the reverse output model has greater discriminatory power relative to all other models.
Original languageEnglish
Number of pages16
JournalInternational Journal of Finance and Economics
Early online date1 May 2024
DOIs
Publication statusE-pub ahead of print - 1 May 2024

Keywords

  • Non-performing loans
  • Bank Efficiency
  • Data Envelopment Analysis
  • Reverse Outputs
  • Extended Strong Disposability

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