The analysis of Taiwanese bank efficiency: Incorporating both external environment risk and internal risk

This study adopts a three-stage approach 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 the 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 third stages. (2) The super-efficiency of domestic banks adjusted by three stages of risk is less than that of internal risk adjusted in one stage. (3) External environmental variables do influence the efficiency of the domestic banks. (4) The influence of external environmental adjustment toward the efficiency of the privately-owned banks is largest when comparing mixed and publicly-owned banks.