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Risk-adjusted efficiency and bank size in a developing economy: an analysis of Vietnamese banks

Minh Le, Viet-Ngu Hoang (), Clevo Wilson () and Thanh Ngo

Journal of Economic Studies, 2020, vol. 47, issue 2, 386-404

Abstract: Purpose - There is ample empirical evidence to show that larger banks are more efficient than smaller banks in developed countries. However, there is very little empirical evidence to show that in small developing economies, such as Vietnam, bank size is associated with increased risk, especially credit risk. This paper aim to provide empirical evidence to fill in this gap. This paper employs a slack-based directional distance function using the intermediation approach in measuring the inefficiency of banks in Vietnam during the period 2006–2015. Non-performing loans are used as an undesirable output to capture credit risk. The results show that small banks are more efficient than large banks at the mean level and across the entire distributions of inefficiency of the two groups. Input waste, output shortage and risk surplus of big banks are nearly three times higher than those of small banks. The results are robust under constant and variable returns to scale for production technologies. The study’s empirical results contribute to the ongoing debate on the merits of enlarging bank size in a small transitional economy and suggest that policy makers should pay attention to the risk and inefficiency of large banks to enhance the performance of Vietnam's banking system as a whole. Design/methodology/approach - This paper uses the non-radial slack-based directional technology distance function developed by Findings - The empirical results of the paper contribute to the ongoing debate on the merits of enlarging bank size in a small transitional economy and suggest that policy makers should pay attention to the risk and inefficiency of large banks to improve the performance of Vietnam's banking system as a whole. Originality/value - This paper extends the extant literature by examining whether efficiency is associated with size in a typical transitional developing economy. The classic Cournot model, the structure-conduct-performance and the efficiency structure hypotheses state that larger banks are more efficient than smaller banks (

Keywords: Risk-adjusted efficiency; Vietnamese banking industry; Slack-based directional distance function (search for similar items in EconPapers)
Date: 2020
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