Operational Environment-adjusted Nationwide Bank Efficiency in China

In addition to managerial factors, the operational environment also brings favorable and unfavorable effects upon banks. This study attempts to separate the inefficiency caused by management and the inefficiency caused by operational environment. Applying the four-stage data envelopment analysis
(DEA) approach proposed by Fried et al. (1999), this paper studies the operational environment-adjusted efficiency of eleven nationwide banks in China from 1995 to 2004. There are two outputs (investment and loans) and three inputs (deposits, employees, and fixed assets) in the DEA model. All nominal variables are transformed into real variables by the GDP deflators at the 1995 price level. After adjusting the input variables by excluding effects caused by environmental factors, state-owned banks show a greater improvement on efficiency. This implies that joint-equity ownership significantly favors nationwide banks in China. State-owned banks can hence engage in ownership reform to improve their efficiency.