Estimating risk efficiency in Middle East banks before and after the crisis: A metafrontier framework

The aim of this study is three-fold. Firstly, it attempts to analyse the effect of risk on Middle East banks' efficiency levels before and after the recent financial crisis. Secondly, it seeks to determine the influence of bank size taking into consideration the possible inefficiency originated to risk abatement cost. Thirdly, it investigates the possible effect of oil price shocks on banks' performance. To examine these issues we introduce a risk efficiency index based on an output orientated directional distance function with weak and strong disposability assumptions. The methodology has been applied on a panel of Middle East banks spanning the period 1998–2014.The empirical findings suggest that on average small banks are more efficient and their size has less negative impact on their technical efficiency and risk management. On the other hand, large banks' risk management is found to be more flexible during the financial crisis. Moreover, banks with higher fixed assets are associated with more costly disposals of non-performing loans justifying the rejection of a positive relation between bank size and technical efficiency. Finally, oil price shocks play a significant role.