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Research on Chinese Banks Risk Management Efficiency
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A Qualitative Index of Risk Management of Chinese Banks as an Intermediate Input in Network DEA
Kent MatthewsCardiff Business SchoolGlobal Science and Technology Forum, 23-24 May 2011, Singapore
Research Design
Obtain survey information on risk management practice and organisation of individual banks.
Compare the responses from Chinese bank risk managers with foreign bank risk managers (benchmark).
Questionnaire – 3 areas of risk management. First – Loan approval decision (large enterprises,
SMEs, consumers). Second – quantitative and qualitative tools used in risk
management. Third – organisation, training and staffing. Chinese and foreign bank risk managers score various
questions on a 1 – 5 scale. 1 is worst and 5 is best.
Sample frame
24 bank executives interviewed over the period 2007-2008.
3 foreign banks, Big-4, 9 joint stock banks, 2 city commercial banks – 15 Chinese banks.
Interviews in - Beijing, Shanghai, Tianjin, Dalian, Guangzhou, Shenzhen.
While the numerical scores provided by the Risk Managers was the primary objective much useful soft information was also provided.
Lending Decision – median response (15 factors)
RISK
0
1
2
3
4
5
X1
X2
X3
X4
X5
X6
X7
X8X9
X10
X11
X12
X13
X14
X15
BENCHMARK
MEDIAN
Individual Factor Wilcoxon* (p<.05)
X1 – Credit Record (SOE) 信誉记录 (国有企业) .014*
X2 – Cash Flow (SOE) 现金流动(国有企业) .022*
X3 – Account profitability (SOE) 账目盈利能力(国有企业) .059
X4 – Collateral or Guarantee (SOE) 抵押担保(国有企业) .078
X5 – Know Your Customer (SOE) 相识客户(国有企业) .006*
X6 – Credit Record (SME) 信誉记录(中小型企业) .022*
X7 – Cash Flow (SME) 现金流到(中小型企业) .008*
X8 – account profitability (SME) 账目盈利能力(中小型企业) .227
X9 – Collateral or Guarantee 抵押担保 (中小型企业) .008*
X10 – Know Your Customer (SME) 相识客户 (中小型企业) .022*
X11 – Credit Record (Mortgage) 信誉记录 (抵押贷款) .036*
X12 – Personal Income (Consumer loan) 个人收入(消费贷款) .170
X13 – Credit score (personal loans) 信誉评分(个人贷款) .003*
X14 – Net worth of borrower (personal loan) 净价值(个人贷款) .754
X15 – deposit account (personal loan) 存款帐户 (个人贷款) .002*
Risk Management Organisation
ORGANISATION
0
1
2
3
4
5X17
X18
X19
X20
X21
X22X23
X24
X25
X26
X27
BENCHMARK
MEDIAN
X17 – Risk Management Training .001*
X18 – Staffing levels .002*
X19 – Organisation of workloads .036*
X20 – Internal Recruitment .177
X21 – External Recruitment .001*
X22 – University background .286
X23 – Foreign University Training .530
X24 – Experience .100
X25 – Professional qualification .009*
X26 – Higher degree .038*
X27 – Retention Policy .834
Benchmarking
Foreign bank manager responses used as benchmarks.
Negative scores – Chinese bank risk manager score less than benchmark.
Positive score – Chinese bank risk manager score greater than benchmark.
Negative scores are penalised but positive scores are not penalised.
CB=Chinese bank responseFB=Foreign bank response
1001)(13
212
23
xx
xf
ForBChBx
Asymmetric loss function
F(X)
40
50
60
70
80
90
100
110
-4 -2 0 2
X
F(X
)
Principal Component Analysis
Construct two measures using PCA.First principal component.(1) Risk Practice (2) Risk Organisation.
Black Box DEA
Input 1
Input 2
Input 3
Black Box
Output 1
Output 2
Output 3
Network DEA
Recognises there are stages in the production process
Each stage has an intermediate output which is an intermediate input to a further stage.
Three Stages
Stage 1 - Primary inputs: Operational costs and fixed assets
Stage 2 - Intermediate inputs/outputs: Labour costs, non-labour costs, interest costs, branches, (Later we add Risk Management Practice, Risk Management Organisation). Deposits as a primary input.
Stage 3 - Final output: Interest earnings, non-interest earnings and NPL as a bad output
Output is Revenue or Profit Efficiency
Three Exercises conducted
Exercise 1 - Black Box DEA where there are only two stages – 3 inputs and 2 outputs
Exercise 2 – 3-stage DEA without measures of Risk Practice and Risk Organisation but NPL is a bad output.
Exercise 3 - Repeat exercise 2 but use risk organisation index and risk practice index in the process.
Primary Input OC
Primary Input FA
Stage 1 - intermediate outputs
PERS OTHER
Stage 2 - intermediate outputs
INTCOST BR
Stage 3 – final outputs
INT
Stage 2 - Intermediate inputs
Stage 3 Intermediate inputs
Stage 2 Primary input DEP
NPL (bad output = primary input)
ORGPCA
Stage 3 Primary input RISKPCA
Stage 2 Final output OBS
Network framework
The network additions
RISKORG is an intermediate output at stage 2 and an intermediate input at stage 3
RISKPCA is an external input at stage 3 determined by the culture of the bank and political and/or other pressures it faces.
Contribution of Risk Measures
Accounting measure of bank performance is return on assets (ROA) = profits/assets.
Efficiency score from DEA is a measure of efficiency relative to best practice. Efficiency is revenue or profit efficiency.
Correlation between ROA and DEA score should be high if it is a good measure.
Profit and efficiency
0 0.2 0.4 0.6 0.8 1 1.2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Profit and efficiency
score
RO
A
Contribution of Risk Measures
Black box DEA Network DEA – without risk measures
Network DEA – with Risk Measures
Intercept 0.328(.197)
0.704***(.000)
0.625***(.000)
NPL_RATIO -.037***(.002)
-.032***(.005)
-.035***(.001)
SCORE 0.911***(.007)
0.877***(.003)
.725***(.000)
R2 .6378 .6755 .7803
MSE .2040 .1931 .1589
F(2,12) 13.33 15.57 25.86
Conclusion
The indices constructed from interviews provide insights into the risk function in Chinese banks relative to best practice
The combination of the risk practice and risk organisation with the other inputs and outputs of the banks in a NDEA framework can be used to measure bank performance.
NDEA provides information to the manager about the stages of production between inputs and outputs.