Abstract
This paper explores the cost and profit efficiencies of banks in China from 1996 to 2005 and their relation to the economic growth. We adopt the one-step stochastic frontier approach to estimate the cost and profit frontiers and efficiencies. The profit efficiency of banks has been improved after year 2000 while the cost efficiency of them decayed during the same time period. Nevertheless, according to our empirical results, the Big Fours, private banks and banks with high the deposits-to-assets ratio tend to have low volatility of the cost efficiency. The high deposits-to-assets ratio also helps reduce the volatility of the profit efficiency. Consequently, according to the empirical results, the privatization of the Big Fours is the key to reduce the volatility of cost efficiency in the banking operations in China and high deposits-to-asset ratio contributes to both cost and profit efficiencies.
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