Analysis On Commercial Bank Cost Efficiency In China (2008-2012)

This paper employs Battese and Coelli (1992) model of StochasticFrontier Analysis (SFA) to analyze the cost efficiencies of nationwide andlocal banks in China, and further utilizes Battese and Coelli (1995) modelto elucidate the influencing factors of efficiency discrepancies. A fewpieces of advice are put forward based on the preceding analysis.This paper first reviews the lectures about commercial banks, andsummarizes main approaches of efficiency measurement, parameterapproach and non-parameter approach, and the input-output determinationmethods of commercial banks. Then it focuses on three evolving models ofSFA, basic SFA model (1977), Battese and Coelli (1992) and Battese andCoelli (1995). Finally, Cobb-Douglas cost function, input-outputparameters and influencing factors are introduced.After utilizing Battese and Coelli (1992) model to do StochasticFrontier Analysis on nationwide and local banks respectively, this paperderives the cost efficiencies of them from year2008to2012, and comparesthe cost efficiency trends of both categories. The results show that theefficiency of nationwide banks drops a bit in2009, and recovers duringyear2010to2012. Local banks’ cost efficiency, on the contrary, spread inthe interval, and the average efficiency decreases for the whole period. Theregression also suggests that state-own banks’ efficiency ranks above theaverage.Then this paper tries to analyze the influencing factors of costefficiency from different perspectives, ranging from macro to intermediateto micro angles. The regression result explains that total asset, interest revenue ratio have a positive effect on cost efficiency for nationwide banks.Larger asset and interest revenue ratios will benefit the improvement ofcost efficiency. Finance interrelation ratio influences efficiency negatively.Apart from the given ratios, local banks are also sensitive to endemiccompetition. Specifically, asset and finance interrelation ratio havenegative influence on efficiency, while interest revenue ratio and netinterest margin influenced it positively. If there are two or more localbanks in one area, the cost efficiency of both banks will decrease.The fifth part of the paper analyzed the rank consistency of Batteseand Coelli (1992) and Battese and Coelli (1995). The correlation analysisstates that the ranks of different models are consistent with each other. AsBattese and Coelli (1995) model can decompose the influencing factors inone step, so it dominates the1992model.Finally, this paper advises that the government should accelerate theinterest rate liberalization process to force banks to focus on businessinnovation. At the same time, the authority should also oversee the localbank industries to avoid overdue competition.