Abstract
As the consolidation of financial institutions is one of the highlights in recent financial territory, we examine whether banks being subordinated under the financial holding company (FHCs) outperform to independent banks in Taiwan, covering 15 FHCs banks and 18 independent banks in our sample for the period from 2005 to 2010. Using the CAMEL approach, we also investigate empirically further the financial determinants of banks’ performance regarding FHCs banks and independent banks respectively, and examine whether the financial determinants of banks’ performance differ before and after the financial crisis. Results show that ROA is strongly related to certain CAMEL ratios, such as the total capital ratio, loan loss reserve/gross loans, the burden ratio, and net interest income divided by total assets. Moreover, the positive significant capital adequacy ratio in the post-crisis period in our sample is mainly driven by subordinated banks. Finally, asset quality factor has explaining power for the pre-crisis and post-crisis periods, meaning prevention safety net built predominantly in refraining from external shocks.
Highlights
The establishment of financial holding companies (FHCs) could promote economies of scale and enable the banking sector to compete more efficiently
By applying the data envelopment analysis (DEA) approach to calculate for bank efficiency and a total factor productivity index to measure the productivity of banks, the results show that except for pure technical efficiency, other efficiencies and productivity of the banks have not improved because of their establishment or joining in FHCs
EP_INI is calculated as net interest income divided by total assets
Summary
The establishment of financial holding companies (FHCs) could promote economies of scale and enable the banking sector to compete more efficiently. With most of countries having a bank-based financial system, it virtually draws attention on determining factors for profitability in the banking sector. As till 2010, 15 FHCs have begun operating in Taiwan and one commercial bank (Chang Hwa Commercial Bank) controlled by majority stock shares of a FHC (Taishin International Financial Holdings) constitute the major component of the domestic financial market. In addition to banks’ performance, whether a sound and profitable financial banking system is more sustainable to ensure market stability from any negative shocks, such as the US subprime crisis is essential.
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