Risk Incorporation and Efficiency in Emerging Market Banks During the Global Crisis: Evidence from Turkey, 2002-2009

This study focuses on the efficiency measures of deposit banks operating in Turkey following the twin crises of 2000 and 2001 and applies a new approach in bank efficiency analysis by incorporating credit risk as an undesirable by-product in a multi-output model. Data envelopment analysis is used to assess the long-term performance trend in the context of balance sheet and revenue approaches. Empirical results indicate that the efficiency of deposit banks improve significantly in the restructuring period. The global crisis does not seem to have had a significant impact on managerial efficiency in the deposit banks operating in Turkey. The most striking finding is that the efficiency scores are much lower when nonperforming loans are incorporated as an undesirable output in the model. This shows that all efficiency studies in the literature that ignore undesirable output overestimate efficiency scores.