Cost efficiency and banking performances in a partial universal banking system: application of the panel smooth threshold model

This paper studies the cost efficiency of bank in a partial universal banking system (PUBS), Taiwan. Instead of assuming one common technology in the bank cost function, two technologies are assumed to be imbedded in the cost function. Fee revenues are used as threshold to divide the banks into two technologies. A bank whose fee revenues exceeding the threshold is designated as universal bank technology while falling below the threshold is designated as traditional deposit-loan technology. The panel smooth transition model is adopted, which allows banks to smoothly adjust between the two technologies. Two criteria are suggested, overbanking and the trend-toward-fee revenues, to assess the new model's performances. With respect to scale economies, the results do find a panel smooth transition model yield more reasonable results than the conventional OLS and random effect of panel data approach. Based on the panel smooth transition model, the optimal fixed asset size is around ten billion New Taiwan dollars.