Efficiency Estimation Of Chinese Banks Based On Stochastic Frontier Approach

The banking, as the core of the financial system of a country, influences a country's economy and the overall competence. Looking back the course of China's Reform in 30 years, the banking has made great progress in our country's economics, financial development and Open Policy. With the speedy development of economic globalization, the financial market in China is more and more market-dominant and international. Under such circumstances, the banking is taking on more responsibilities as well as facing more challenges.The subjects of this thesis are Chinese banks, including three Policy banks, four State-owned commercial banks and eight major Shareholding commercial banks. In this thesis, Policy banks are taken as research subjects, which is due to the reality that a reform is going on involving China's financial system. In future, Policy banks in China are inclining to be more commercial than political. They will someday be completely market-dominated. That's why Policy banks are listed in the subjects of this thesis. The researcher hopes that it will give some indication to the improvement in efficiency of Policy banks as well as the whole banking system in China.The thesis aims to blueprint two models-Cost inefficiency estimation model and Inefficiency factor estimation model, based on Stochastic Frontier Approach (Battese and Coelli, 1995). Maximum likelihood estimation method is applied to get the banks Stochastic Cost Frontier Function between 1999 and 2005. The thesis also estimates our banks cost inefficiency values and the technical inefficiency influencing factors values. It is proved in this thesis that among the three types of banks the efficiency of State-owned banks is the lowest, inferior to Policy banks, and Shareholding commercial banks have the best efficiency in the three. It is also found out that the reform in Chinese banks has achieved obvious progress, which contributes to great improvement in bank's efficiency. At the same time, China's joining in WTO also accordingly influences China's economy and finance.This thesis, by probing the variable factors that prohibit bank's efficiency, gives some valuable suggestions and hints to the improvement of the banking in China. It is supposed that China can set up more advanced, healthy and international banking system by founding commercial regulations, improving banking structure, enforcing staff management and trying creative service procedures.