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The influence of the market power of Chinese commercial banks on efficiency and stability

Author

Listed:
  • Xiangning Wang
  • Xianming Zeng
  • Zhiyang Zhang

Abstract

Purpose - – The purpose of this paper is to estimate the cost and profit efficiency (PE) of Chinese commercial banks in the last ten years and investigate how market power affects bank efficiency and stability. Design/methodology/approach - – The paper builds a stochastic frontier analysis model to evaluate the cost and PE of commercial banks. The paper then uses a Lerner index andZ-index to represent market power and stability, respectively. In addition, the paper empirically analyzes the relationship between market power and bank efficiency, stability in the last ten years. Findings - – The results show that the efficiency of banks on the Chinese mainland increased during the study period, but is still lower than that of banks in Hong Kong; moreover, the efficiency of four state-owned commercial banks is lower than that of medium and small banks. Market power has a negative relationship with efficiency while its relationship with stability varies among Chinese banks. Research limitations/implications - – The results imply that the promotion of financial liberalization and banking reform to introduce an appropriate competition mechanism has had a positive effect on the efficiency and stability of Chinese commercial banks. Practical implications - – Thus, the paper will contribute to deepen reform and opening up the banking sector in China. Social implications - – The healthy development of banking can enhance the ability of banks to withstand financial risks, to promote the harmonious development of society. Originality/value - – The paper estimates the cost and PE of Chinese commercial banks using SFA model and investigates how market power affects bank efficiency and stability. The study design has a certain novelty, where Lerner index andZindex are used, respectively, to measure market power and stability and management efficiency of commercial banks is investigated from two aspects – PE and cost efficiency – by the translog cost function, instead of Douglas production function. In addition, the paper tries to put some of Hong Kong banks included in the study sample, and has a certain reference value.

Suggested Citation

  • Xiangning Wang & Xianming Zeng & Zhiyang Zhang, 2014. "The influence of the market power of Chinese commercial banks on efficiency and stability," China Finance Review International, Emerald Group Publishing Limited, vol. 4(4), pages 307-325, November.
    • Handle: RePEc:eme:cfripp:v:4:y:2014:i:4:p:307-325
    DOI: 10.1108/CFRI-07-2013-0096
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    Citations

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    Cited by:

    1. Samangi Bandaranayake & Kuntal K. Das & Robert W. Reed, 2020. "Another Look At ‘Bank Competition And Financial Stability: Much Ado About Nothing’?," Journal of Economic Surveys, Wiley Blackwell, vol. 34(2), pages 344-371, April.
    2. Samangi Bandaranayake & Kuntal K. Das & W. Robert Reed, 2018. "A Replication of “Bank Competition and Financial Stability: Much Ado About Nothing?” (Journal of Economic Surveys, 2016)," Working Papers in Economics 18/18, University of Canterbury, Department of Economics and Finance.
    3. Ayesha Hameed & Tahir Saeed Jagirani & Mohammad Qamar Qureshi & Aisha Riaz, 2024. "The Causal Linkages between Market Power and Cost Efficiency: Testing Quiet Life Hypothesis for the Banking Industry," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 13(1), pages 803-811.
    4. Yiyi Bai & Zhisheng Li & Huan Liu, 2019. "Financial outreach and household financial constraint," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1503-1523, March.
    5. David Adeabah & Charles Andoh, 2020. "Cost efficiency and welfare performance of banks: evidence from an emerging economy," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(5), pages 549-574, July.
    6. Akande Joseph Olorunfemi & Kwenda Farai, 2017. "Competitive Condition of Sub-Saharan Africa Commercial Banks," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 62(2), pages 55-76, August.

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