Planning and Budgeting

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This article basically tries to examine the relationship between efficiency and risk in Iranian banking system. The scholars here simply employ two approaches, i.e. parametric (economic-based) approach, and non-parametric (mathematical optimization-based) approach, to assess the efficiency, rank the banks, select the optimal model and at last, identify the impact of credit, operational and liquidity risks on banking system. To meet such an end, 15 banks were taken as the statistical population of the research during 2005-2010. The findings illustrate a difference between the two parametric and non-parametric efficiency assessment approaches in ranking the banks in the mean time, they signify a relative superiority of Stochastic Frontier Approach (SFA) over Multi- Directional Efficiency Analysis (MEA). Eventually, the results indicate a significant relationship between “credit, operational and liquidity risks” and the efficiency in Iranian banking system.

Keywords: Efficiency, Risk, Risk-Efficiency Relationship, Multi - Directional Efficiency Analysis (MEA), Stochastic Frontier Approach (SFA)

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