Efficiency and productivity analysis in ten Asian banking industries

Over the last few decades, numerous studies have adopted efficiency and productivity techniques to examine and evaluate the overall performance of banking industries to inform policy effect as well as identify the best practice. The majority of banking efficiency and productivity studies focus on the developed US and European countries. There are only limited studies in the Asian banking industries but no cross-country comparison in major Asian economies. To fill this literature gap, this thesis attempts to measure and compare the cost efficiency and total factor productivity change in ten Asian banking sectors using an unbalanced panel data set consisting of 280 commercial banks over the period of 1998 to 2005. It is widely agreed that cross-country differences play an important part in examining banks performance in international comparison. They can influence the frontier technology as additional explanatory variables or they can enter inefficiency directly as a measure of determinants or heteroscedasticity. Both cases are considered in the empirical sections of this thesis. In the former case, the empirical results from systematic comparisons of panel data stochastic frontier models with and without incorporating these cross-country heterogeneities suggests that cross-country differences are important sources to explain banks performances therefore they should not be neglected. The overall cost efficiency in these Asian banking industries is 0.5897 with a decreasing trend, despite positive technical progress and slight economies of scale. The total factor productivity change is measured by using a new cost-based total factor productivity index, an index number counterpart of Bauer's (1990) total differential approach. A five-way decomposition is also provided with the attempt to identify the main contributors to the productivity change. Overall, Asian banking industries have experienced positive but not substantial productivity change from 1998-05. In the latter case, a general model that considers exogenous influences in both inefficiency and random noise error term is constructed and compared against other alternative specifications. The empirical results favour this general model and the overall and country-specific cost efficiency and total factor productivity are then estimated and calculated.