Measuring and categorizing technical efficiency and productivity change of commercial banks in Taiwan

Abstract

The banking industry plays a key role in the process of Taiwan’s economic development, and the structure of the financial system in Taiwan has turned from a controlled system into a liberalized one. In this paper, we employ the Malmquist productivity index approach, which is calculated from efficiency scores based on DEA linear programming technique, to measure the technical efficiency and productivity change of the 25 commercial banks in Taiwan over the post Asian crisis period 1997–2001. We find that the technical efficiencies of 15 banks have been improving while 10 banks have been declining over the period. It is also found that the banking industry has a decrease in technical efficiency but owns upward shifts of technology since year 1998. Based on technical efficiency and the efficiency change of the banks, we classify the 25 banks in Taiwan into four categories to help realize the competitiveness and technical progress of the banks. Some of the commercial banks need to search for financial innovation activities and carry on production differentiation to be competitive in the market.