A cost efficiency analysis of local commercial banks in Taiwan

Abstract

This study uses a Stochastic Frontier Analysis (SFA) model to evaluate the relative cost efficiency of each local commercial bank in Taiwan. The data was available through the website of Taiwan’s Banking Bureau and Financial Supervisory Commission (FSC). The main result of the SFA model indicates that the banks affiliated with bank holding companies (BHCs) have been increasingly efficient. However, unaffiliated banks have not been keeping pace in regards to efficiency. While this result is based on ownership structure, there are other results that find balance sheet and income statement composition also impact efficiency. For example, there is an increase in efficiency when the amount of loans increases, the price of capital increases, and there is an interaction between the prices of labor and capital.