Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector

Fábio Lucas Takahashi and Marcos Roberto Vasconcelos

Finance Research Letters, 2024, vol. 59, issue C

Abstract: This study aims to analyze the impact of non-performing loans (NPLs) on the technical efficiency of banks in the Brazilian banking sector and to identify determinants of bank efficiency. The Directional Distance Function (DDF) method is used to measure banks’ technical efficiency and identify the factors that affect it. The results show that NPLs negatively impact efficiency, compromising banking operations and reducing the ability to produce new loans, affecting profitability. From 2003 to 2019, foreign banks were, on average, more efficient than domestic public and private banks. During COVID-19 (2020–2022), federal public banks were the most efficient. The analysis also suggests that the low efficiency of domestic public banks is associated with the lower technical quality of state public banks. The practical implications of this study are that banks must manage their NPLs effectively to improve their efficiency and profitability. This study's originality lies in analyzing the determinants of bank efficiency in Brazil, which can help banks improve their efficiency and performance.

Keywords: Bank efficiency; Two-stage analysis; Directional distance function; Non-performing loans; Brazilian banks (search for similar items in EconPapers)
JEL-codes: B23 B26 C24 G20 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323010231

DOI: 10.1016/j.frl.2023.104651

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