Taiwan's Banking Industry Research Articles

An estimation of X-inefficiency in Taiwan's banks

This paper employs data envelopment analysis to investigate the effects of X-inefficiency on Taiwan's banking industry. A modified measure to examine bank efficiency is proposed and it is found that banks' X-inefficiency has substantially dropped off in Taiwan over the last 10 years, falling from an average X-inefficiency magnitude of 3.9% in 1988 to 2.0% in 1997. Banks did improve their relative abilities to both maximize outputs and minimize inputs between ex post and ex ante of 1990s. The results obtained in this research may affirm the validity of banking deregulation policy in Taiwan.

Estimating Scale and Scope Economies with Fourier Flexible Functional Form – Evidence from Taiwan's Banking Industry

In this study the scale and scope economies for Taiwan's banking sector using panel data from 22 domestic banks for the period 1981–1997 is investigated quantitatively using both a Fourier flexible functional form, first proposed by Gallant (1981, 1982), and a translog function. This study's results favour the use of the former, based on tests of regression coefficients and on estimates of various economy measures. The Fourier evidence shows that only smaller banks exhibit increasing returns to scale, while larger banks exhibit decreasing returns to scale. Conversely, the translog indicates that all the sample groups continue to enjoy economies of scale. Banks in Taiwan exhibit scope diseconomies, which suggest that sample banks should continue efforts to diversify their financial products, which in turn could substantially reduce their average costs.

Measuring scale and scope economies in multiproduct banking? A stochastic frontier cost function approach

Most studies on the economies of scale and scope in the banking industry assume no x-inefficiencies. That is, banks are assumed to be always on their efficient frontier, which can in empirical studies confound scale and scope efficiencies with x-efficiencies. The current paper employs a stochastic frontier cost function incorporating technical and allocative inefficiencies, as well as a system of share equations, to estimate scale and scope efficiencies. Using data from Taiwan's banking industry, evidence is found that both scale and scope economies exist, and that the assumption of no x-inefficiencies results in underestimating such economies.

Bank Market Structure and Performance in Taiwan Before and After the 1991 Liberalization

Two competing hypotheses regarding market structure and the performance of firms are the traditional "structure-conduct-performance" (SCP) hypothesis, in which high concentration lowers the cost of collusion and earns monopoly rents, and the "efficiency" hypothesis, which emphasizes the operating efficiency of particular firms. In this paper, we present the results from testing both the hypotheses in the context of Taiwan's banking market. Our goal is to understand the effect of the 1991 liberalization policy by examining whether market structure and firm performance in this industry differ in the periods before and after the 1991 revisions to the Banking Act. Prior to the 1991 revisions, our results do not support either the SCP or the efficiency hypothesis for Taiwan's banking industry. The industry's market structure seems to exhibit a kind of "quiet-life" competing environment. The results for the period after the 1991 revisions tend to support the competing efficiency hypothesis. Our findings suggest that the 1991 revisions to the Banking Act have stimulated competition and brought about an emphasis on efficiency in Taiwan's banking industry.

A Parametric Estimation of Bank Efficiencies Using a Flexible Profit Function with Panel Data

This paper generalises Kumbhakar's (1996a) single product shadow profit function to a multiproduct one, which in contrast to Berger, Hancock, and Humphrey (1993) is consistent with a firm's profit maximising behaviour. By estimating a parametric translog profit function, which does not require special assumptions about the error distribution, and using panel data from Taiwan's banking industry, the following conclusions can be drawn: (i) Parameter estimates from the translog functional form are more robust than those from the Fuss (non‐logarithmic) form. (ii) More than half of all potential variable profits are found to be lost due to inefficiencies. (iii) Greater reduction in profit results from deficient output revenues than from a suboptimal input mix. (iv) The model finds technical progress during the sample period. (v) A type of ‘weakly’ optimal scope economies is detected, which suggests that the joint production of the two products can increase profits for some banks while not hurting the profits of others.