Examining the effect of risk on bank performance by using data envelopment analysis

This paper investigates the impact of risk on banks performance. Banks, as a major source of financial intermediation and payment channel, play a vital role in the economic development of each country. The banking industry has been analysed through data envelopment analysis (DEA) by a number of researchers. DEA is a non‐parametric method for relative evaluating the decision‐making units (DMUs) with multiple inputs and outputs. In this study, due to the complexity and the subdivisions of the banks, the network DEA model was used. A three‐stage model for evaluating the performance of bank branches was proposed and moreover, performance measurement and analysis was done through three models. In order to measure the effectiveness of risk in the first model, the risk‐free efficiency was measured. Then, by adding risk to the model, risk‐efficiency was obtained which considered as an undesirable indicator. In the third model, to consider the importance of risk, weight restriction was used in the model. The results of the three models show that the performance of the third model is much more desirable than the other models.