Journal of Operational Risk

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An assessment of the efficiency of operational risk management in Taiwan’s banking industry: an application of the stochastic frontier approach

Hsiang-Hsi Liu and Mauricio Cortes

ABSTRACT

This paper discusses the importance of operational risk management for the efficiency of Taiwanese banks. We demonstrate that by applying risk managerial strategies banks can improve their performance, soundness and resilience, which is measured by their risk-adjusted return on capital. In order to perform this activity, a stochastic frontier analysis is applied to Taiwanese bank data from 2008 to 2010. We find that absorption capability, supervisory review and market discipline improve banks' operational efficiency, while leniency on governance risk management compliance and opacity increase their technical inefficiency.

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