The empirical analysis of technical progress efficiency and risk in Chinese banking

The previous discuss on the Chinese bank efficiency always neglected the risk factors effects, and there is little research to investigate the relationship between risk and efficiency in domestic study for banking industry. This paper analyzes the technical progress efficiency of the Chinese banks during 1996 and 2006, and compares the effect differences between the risk-adjusted model and the model without risk factors. The result shows that the risk factors make a notable influence for the technical progress efficiency estimate. When take all the risk factors into account, the efficiency of technical progress for all the Chinese banks is between 7%-10% in the cost function and 3%-7% in the profit function, suggesting that all the banks can benefit from the technical progress and innovation. When omitting the risk factors, we may overestimate the level of technical efficiency by nearly 2%-4%.