Detecting skimping in bank production process with non-performing loans: A distance minimization approach

Hirofumi Fukuyama, Roman Matousek and Nickolaos G. Tzeremes

Economic Modelling, 2025, vol. 152, issue C

Abstract: We propose a minimum-distance efficiency model that incorporates material-balance constraints and treats non-performing loans (NPLs) as an explicit, undesirable output. Unlike radial distance functions, our non-radial formulation lets each input and output adjust independently. This flexibility uncovers latent inefficiencies most notably skimping. Skimping arises when managers cut loan-monitoring costs today at the expense of future asset quality. Applied to U.S. commercial banks over 2003–2017, the model shows that institutions reporting high short-run cost efficiency often experience a subsequent rise in NPLs, suggesting potential skimping behavior. For every bank, the estimator delivers a tailored vector of adjustments for assets, staff, loans, securities, and NPLs that would move it to the best-practice frontier, thus supplying managers with concrete, risk-aware performance targets. By linking operating choices, credit-risk outcomes, and overall efficiency within a single framework, the study offers regulators and practitioners a more informative tool for diagnosing performance shortfalls and designing corrective strategies.

Keywords: Data envelopment analysis; Non-performing loans; Bank performance; Material balance principle; Minimum distance approach (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325003001

DOI: 10.1016/j.econmod.2025.107305

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