Impact of Operational Risk Toward the Efficiency of Banking - Evidence from Taiwans Banking Industry

Cheng-Ping Cheng (), Manh Trung Phung (), Chun-Lin Hsiao, Da-Bai Shen and Bih-Shiow Chen

Asian Economic and Financial Review, 2018, vol. 8, issue 6, 815-831

Abstract: This study adopts a GARCH model to estimate the operational risk of Taiwan’s banking industry by the Top-Down method. Based on the approach of Battese and Coelli (1995) we estimate the Trans-log cost model and the inefficient model simultaneously by the Maximum likelihood method. Our empirical result shows that the operational risks have a significantly positive impact on cost inefficiency - that is, regardless of which methods we use for calculation, operational risk drives down economic efficiency. Comparing with the basic index method, the multi-factor model of the Top-Down method is better at analyzing the relationship of operational risk and efficiency.

Keywords: Basel II; Operational risk; Top-Down method; Stochastic frontier; Cost efficiency; Time series; GARCH. (search for similar items in EconPapers)
Date: 2018
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