Cost efficiency analysis in banking industries of ten Asian countries and regions

Despite the great achievement of three decades of economic reform, the Chinese banking sector takes the blame for its dysfunctional system, especially the large amount of non-performing loans. The ease of foreign banks’ entry set by the WTO from December 2007 raises our concern of the capability of domestic banks to compete against foreign Asian banks. This study attempts to address this issue by measuring the cost efficiency of ten major Asian banking industries from 1998 to 2005 using panel data stochastic frontier approaches. Based on our preferred consistent panel data estimating models, the higher cost efficiency score from including cross-country environmental variables suggests that differences between countries can explain part of the inefficiency. We also find that the overall cost efficiency level of Chinese commercial banks ranks in the fifth place, suggesting that Chinese banks still need to strengthen their ability in competition. Some policy implications are also suggested.