A study on profitability and marketability of Taiwanese bank firms before and after the Financial Holding Company Act

Abstract

The purpose of this paper is to determine whether the subordinate subsidiary to a financial institution can improve the operating performance by establishing financial holding companies (FHCs) in Taiwan. Current research uses data envelopment analysis (DEA) to measure profitability and marketability changes among 14 banks with subsidiaries as FHCs. The DEA models include the CCR and BCC models, both of which analyse the overall efficiency, technical efficiency, and scale efficiency of banks. We used the bilateral model to measure and compare differences in operating performance before and after implementation of the FHC Act. Results show that except for scale efficiency of profitability, other efficiencies of banks do not improved because of their conglomerate in FHCs; however, inefficiency occurs primarily on scale which is derived from diseconomies of scale. Contrary to the purpose with FHC, the efficiency scores of 2003–2007 were lower than those of 1997–2001. The bilateral model shows that prior to the implementation of the FHC Act, banks demonstrated higher levels of efficiency than banks with FHCs subsidiary. Management implications for the Taiwanese banking industry are discussed.