Abstract
This study examines the impact of bond markets on both bank profit and cost efficiency. By employing the stochastic frontier approach and utilizing a large micro dataset for 926 banks covering 27 economies from the Asia and Pacific region over the period from 2004 to 2017, we find that both the bond market development and bond market structure are relevant to bank efficiency. The development of bond markets generally has a positive (negative) effect on bank profit (cost) efficiency. Given the development level of the aggregate bond market, increasing the proportion of corporate bonds will enhance both bank profit and cost efficiency. Moreover, given the development level of a country’s corporate bond market, a greater share of local currency corporate bonds is significantly and positively related to both bank profit and cost efficiency. In addition, increasing share of bank-issued corporate bonds in corporate bonds significantly increases (decreases) bank profit (cost) efficiency. Overall, our results point to the significant importance of local currency corporate bonds to the overall bank efficiency. Our findings provide important implications for both policy makers and bank management.
Highlights
The essential role of the financial intermediation function provided by banks in a country’s economic activities has been well established in the finance and growth literature.1 Empirical research has strongly supported the view that banks promote economic growth at the country, industry, and firm levels.2 the efficiency of bank functioning is one of the major concerns of regulators and policy makers.Given the crucial role of bank functioning to a country’s economic growth, bank efficiency has become a long-lasting topical issue and has been extensively examined in economic and finance research
We look at the overall development of three bond markets, the aggregate bond market that includes both government bonds and corporate bonds, the government bond market, and the corporate bond market
We examine the effect of the corporate bond market structure on bank efficiency
Summary
The essential role of the financial intermediation function provided by banks (and other financial institutions) in a country’s economic activities has been well established in the finance and growth literature. Empirical research has strongly supported the view that banks promote economic growth at the country, industry, and firm levels. the efficiency of bank functioning is one of the major concerns of regulators and policy makers. We address the issues by employing the stochastic frontier approach (SFA) to measure bank efficiency and utilizing a large dataset covering 27 economies from the Asia and Pacific region over the period 2004–2017 We find that both the bond market development and bond market structure are relevant to bank efficiency even controlling for country-specific factors, banking industry-specific, and bank-level characteristics. This research contributes to the literature in the following important aspects: First, to the best of our knowledge, this is the first empirical study to comprehensively examine the impact of bond markets on bank efficiency, and it provides new empirical evidence highlighting the significant role of the public debt providers in shaping the efficiency of the private debt providers, .
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