A study of bank efficiency and ownership in Taiwan
Applied Economics Letters, 1998, 5, 613–616
A study of bank efficiency and ownership in Taiwan
TSER-YIETH CHEN
Chung-Hua Institution for Economic Research, No. 75, Chang-shing St., Taipei,
Taiwan, 10671
Received 7 April 1997
This paper uses a data envelopment analysis (DEA) approach to create a benchmark measure for the relative operating efficiency of the publicly operated banks as well as their private counterparts in Taiwan. From the estimated results, we find that there are significant differences in efficiency between privately-owned banks and publicly-owned banks. It shows that the efficiency gains from privatization may be substantial. By analysing the sources of inefficiency, we can also indicate the remedy for the specific publicly- owned banks, and affirm the validity of the privatization policy.
I.
INTRODUCTION
In the early 1990s, Taiwan joined the trend to bank deregulation to increase operating efficiency and to attract funds into the loanable fund supply market. The primary reasons included continued dissatisfaction with these bank’s low service quality and financial inefficiency under public ownership. Government then invited domestic and foreign investors to participate in Taiwan’s banking system and set up new, privately-owned commercial banks since 1992. In 1996, there were 34 commercial banks in Taiwan. Of these, 7 were publicly operated and 27 were privately operated.
Moreover, Taiwan’s government like many other industrialized countries, wishes to demonstrate its success by illustrating that privatization leads to higher efficiency and lower costs in the current banking system. Thus, if a positive link is examined between private ownership and efficiency, it could suggest that the privately- owned banks have provided a good example of relatively high efficiency compared with publicly- owned ones. Owing to the fact that the newlyestablished banks have only been in operation three years and have just
A study of bank efficiency and ownership in Taiwan
TSER-YIETH CHEN
Chung-Hua Institution for Economic Research, No. 75, Chang-shing St., Taipei,
Taiwan, 10671
Received 7 April 1997
This paper uses a data envelopment analysis (DEA) approach to create a benchmark measure for the relative operating efficiency of the publicly operated banks as well as their private counterparts in Taiwan. From the estimated results, we find that there are significant differences in efficiency between privately-owned banks and publicly-owned banks. It shows that the efficiency gains from privatization may be substantial. By analysing the sources of inefficiency, we can also indicate the remedy for the specific publicly- owned banks, and affirm the validity of the privatization policy.
I.
INTRODUCTION
In the early 1990s, Taiwan joined the trend to bank deregulation to increase operating efficiency and to attract funds into the loanable fund supply market. The primary reasons included continued dissatisfaction with these bank’s low service quality and financial inefficiency under public ownership. Government then invited domestic and foreign investors to participate in Taiwan’s banking system and set up new, privately-owned commercial banks since 1992. In 1996, there were 34 commercial banks in Taiwan. Of these, 7 were publicly operated and 27 were privately operated.
Moreover, Taiwan’s government like many other industrialized countries, wishes to demonstrate its success by illustrating that privatization leads to higher efficiency and lower costs in the current banking system. Thus, if a positive link is examined between private ownership and efficiency, it could suggest that the privately- owned banks have provided a good example of relatively high efficiency compared with publicly- owned ones. Owing to the fact that the newlyestablished banks have only been in operation three years and have just
References: Banker, R.D., Charness, A. and Cooper, W.W. (1984) Some models for estimating technical and scale inefficiencies in data envelopment analysis, Management Science, 30, 1078–92. Charnes, A., Cooper, W.W. and Rhodes, E. (1978) Measuring the efficiency of decision making units, European Jou rnal of Operational Research , 2, 429–44. Yue, P. (1992) Data envelopment analysis and commercial bank performance: A Primer with applications to Missouri banks, Federal R eserve Bank of St. Lou is, Janu ary/Febru ary, 31–45.