This thesis adopts a new operational method to measure and investigate the relationship among cost efficiency, market competition and profitability in major Asian economies by using an unbalanced panel data sample of 278 commercial banks during the financial upheaval period of 2005-2012 before and after the global financial crisis.
Firstly, we estimate the cost efficiency by employing different stochastic frontier analysis (SFA) models, which include the equity capital to indicate loss-absorbing capacity and risk preference and cross-country differences to be additional environmental variables. It is generally agreed that cross-country differences influence the frontier technology in the international comparison of banks performance. In this case, we implement the international comparison under SFA models with and without incorporating these cross-country heterogeneities. And the empirical results suggest that cross-country differences are significant sources to measure banks cost efficiency and evaluate banks performance.
Secondly, we measure the market competition by investigating a range of approaches: the traditional Structure-Conduct-Performance approach, Lerner index, and new empirical industrial organization Panzar-Rosse approach. And we find that the SCP-Lerner approach may fail to identify the strength of competition and may not always unambiguously distinguish between the market power and the efficiency explanations of market concentration.
Finally, following the approach of Boone, we measure the intensity of competition in two ways: the profit elasticity and the relative profit difference (calculated by cost efficiency score and shadow return on equity capital). Then we implement a quadratic quantile regression to compute the integral areas and standard errors for the Boone visual test and Wald test to reflect the relative intensity of competition for different competitive regimes over time. Our findings show that competition of banking industries become more intense in 9 Asian economies in the wake of the financial crisis and that two advanced economies (Singapore and Taiwan Province of China) and two remarkable emerging economies (China and India) play the significantly leading role in this intensifying competition process.
A Doctoral Thesis. Submitted in partial fulfilment of the requirements for the award of Doctor of Philosophy of Loughborough University.