Efficiency evaluation of banks in China: A dynamic two-stage slacks-based measure approach

●The banks in China can be considered as dynamic two-stage systems.●As a carry-over factor, non-performing loan has dynamic effects on the efficiency.●A dynamic two-stage DEA model on the basis of slacks-based measure is proposed.●Two-stage process and carry-over factor are both considered in the proposed model.●The proposed model can effectively identify the inefficiencies of Chinese banks.

Operational processes of banks in China can be divided into productivity and profitability stages. Within this, non-performing loans can be treated as a carry-over variable, an undesirable output of the profitability stage in the previous period but an input to the profitability stage in the current period. Using this framework, this paper proposes a dynamic two-stage slacks-based measure model to evaluate the efficiencies of Chinese banks. Based on the proposed model, the measures of stage, period and period stage efficiencies are defined. The proposed approach is applied to evaluate the operational efficiency of banks in China during 2008–2012. Key findings are that banks in China show both technical and scale inefficiency during 2008–2012, which results from the inefficiencies of both the productivity stage and profitability stage; city-owned commercial banks are more overall technically efficient than state-owned commercial banks and joint-stock commercial banks although state-owned commercial banks show best practice for pure technical efficiency, and city-owned commercial banks perform better than joint-stock commercial banks for pure technical efficiency.