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Cost Efficiency Analysis of Local Commercial Banks in Taiwan

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  • Russell Kashian
  • Elaine Yiling Lin
  • Yuhan Xue

Abstract

This study uses a stochastic frontier analysis (SFA) model to evaluate the relative cost efficiency of commercial banks in Taiwan in the wake of liberalization. The model is estimated using data made available through Taiwan's Banking Bureau and Financial Supervisory Commission. With data from before and after the 2008 financial crisis, our central result is that banks affiliated with bank holding companies (BHC) have become increasingly more efficient. While unaffiliated banks have generally increased their efficiency, they have not kept pace with respect to efficiency gains. Secondary findings are that, independent of ownership structure, both balance sheet and income statement composition affect efficiency. In particular, bank efficiency increases with growth in loans and capital prices. We also find evidence that labor productivity is a key explanatory factor behind efficiency differences across banks. As a result, a policy recommendation is made that banks invest in maximizing worker productivity. Finally, in addition to the insights gained from this study we contribute to the general literature on both bank efficiency and the use of the SFA model by applying it to new data in a new setting.

Suggested Citation

  • Russell Kashian & Elaine Yiling Lin & Yuhan Xue, 2019. "Cost Efficiency Analysis of Local Commercial Banks in Taiwan," Asian Economic Journal, East Asian Economic Association, vol. 33(1), pages 87-108, March.
  • Handle: RePEc:bla:asiaec:v:33:y:2019:i:1:p:87-108
    DOI: 10.1111/asej.12170
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    Cited by:

    1. Clement Olalekan Olaniyi & Titus Ayobami Ojeyinka & Xuan Vinh Vo & Mamdouh Abdulaziz Saleh Al‐Faryan, 2023. "Do business strategies vary across firms in the banking industry? New perspectives from the bank size–profitability nexus," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 525-544, January.
    2. Sabri Boubaker & Duc Trung Do & Helmi Hammami & Kim Cuong Ly, 2022. "The role of bank affiliation in bank efficiency: a fuzzy multi-objective data envelopment analysis approach," Annals of Operations Research, Springer, vol. 311(2), pages 611-639, April.
    3. Ayobami Ojeyinka, Titus & Enisan Akinlo, Anthony, 2021. "Does Bank Size Affect Efficiency? Evidence From Commercial Banks In Nigeria," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 8(1), pages 79-100, June.

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