An Incentive for Risk Taking: The Case of Banks in ASEAN 6

Abstract

Incorporating credit risk into technical efficiency to investigate possible effects of the risk on efficiency for a sample of 276 unique ASEAN commercial banks over the period 2000 -2015, we find a striking U-shaped effect of credit risk on both risk-free efficiency and risk-adjusted efficiency. The U-shaped relationship exists in both large banks and small banks. This finding is new and raises a concern for bank regulators in monitoring and controlling bank risks since banks have an incentive to become more efficient by following greater risk-taking strategies.