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Examining irresponsible lending using non-radial inefficiency measures: Evidence from Australian banks

Amir Moradi-Motlagh and Christine Jubb

Economic Analysis and Policy, 2020, vol. 66, issue C, 96-108

Abstract: This paper aims to reveal how recent methodological advancements in efficiency analysis can be used for determining the extent of irresponsible lending in banking. It examines the legitimacy of concerns about the risk of bad debts by analysing the technical inefficiency of six Australian banks over the period 2007–2016. To this end, we use the weighted Russell directional distance model to gain an in-depth understanding of their inefficiency sources. Not only does this approach enable us to incorporate both desirable and undesirable outputs (e.g. bad loans) in modelling efficiency to examine the level of irresponsible lending but also it determines the level of inefficiency for each input and output. Our results show that the main source of inefficiency is bad and doubtful debts, followed by inefficient use of fixed assets and labour, respectively. The inefficiency level of bad and doubtful debts is at its highest in 2009, gradually decreasing to its lowest in 2014, but again increasing in 2015 and 2016. This finding justifies concerns over the irresponsible lending and the risk of bad debts despite their improvement after the global financial crisis (GFC) in 2008. The results also support the view that Australian banks perform efficiently in undertaking their core business activities of attracting deposits and lending money.

Keywords: Data envelopment analysis; Banking; Efficiency; Undesirable output (search for similar items in EconPapers)
JEL-codes: C14 G21 P42 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.eap.2020.03.003

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