The Impact of Macroeconomic and Regulatory Factors on Bank Efficiency: A Non-Parametric Analysis of Hong Kong's Banking System

Abstract

This working paper was written by Leigh M. Drake (Nottingham University Business School), Maximilian J. B. Hall (Loughborough University) and Richard Simper (Loughborough University).

This paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years, the Hong Kong banking system. These environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks-based, second stage Tobit regression approach advocated by Fried et al (1999). A further innovation is that we also employ Tone's (2001) slacks-based model (SBM) to conduct the Data Envelopment Analysis (DEA), in addition to the more traditional approach attributable to Banker, Charnes and Cooper (BCC) (1984).

The results indicate: high levels of technical inefficiency for many institutions; considerable variations in efficiency levels and trends across size groups and banking sectors; and also differential impacts of environmental factors on different size groups and financial sectors. Surprisingly, the accession of Hong Kong to the People's Republic of China, episodes of financial deregulation, and the 1997/98 South East Asian crisis do not seem to have had a significant independent impact on relative efficiency. However, the results suggest that the impact of the last mentioned may have come via the adverse developments in the macro economy and in the housing market.

Keywords: Data Envelopment Analysis, Slacks Adjustment, Hong Kong Banks, Efficiency, Regulation and Environmental Variables

JEL Classification: C23; C52; G21