An Empirical Analysis On The Risk-Adjusted Profit Efficiency Of Commercial Banks In China

The commercial banks have improved their sense of risk control after the shock of subprime mortgage crisis. As profitable institution, improving their efficiency with rational risk control is the requirement of their profit maximization. At one time, commercial banks are financial agent of the society, and they deliver idle fund from suppliers to demanders, so the banks'operation has significant influence on the efficiency of all the financial resources in capital market. The research on how to control risk and improve efficiency under the new situation has both theoretical and realistic significance.Risk has important effects on the profit efficiency of commercial banks. Introducing the risk factors into the profit efficiency model helps to get more accurate results. This paper employs the stochastic frontier approach of the parameter methods, introduces the risk factors to the Battese and Coelli (1992) model to estimate the efficiency of 14 commercial banks in China from 1995 to 2007. Based on the empirical result, this paper makes analysis on the marginal impact of the risk factors on banks'profit efficiency, and compared the efficiency of state-owned commercial banks and the joint-equity commercial banks. The results indicate that the marginal effect of risk to the state-owned bank is declining, but is converging at a certain level. The state-owned banks have higher efficiency than the joint-equity banks, and the two groups show different trend. According to the conclusions, this paper offered some suggestions to commercial banks about how to control risk and improve efficiency.