The Cost Efficiency of Commercial Banks in Hong Kong

16 Pages Posted: 28 Nov 2007

See all articles by Jim Wong

Jim Wong

Hong Kong Monetary Authority

Tom Fong

Hong Kong Monetary Authority

T. C. Wong

Hong Kong Monetary Authority - Research Department

Ka-fai Choi

Hong Kong Monetary Authority

Date Written: September 13, 2006

Abstract

Using the stochastic frontier approach and a panel dataset of retail banks, this paper assesses the cost efficiency of the banking sector in Hong Kong. The average cost inefficiency during the period 1992-2005 is found to be about 15% to 29% of observed total costs, which is largely in line with the experience of US and European banks. Cost efficiency is found to be correlated with macroeconomic conditions, with a significant rise in cost inefficiency triggered by the Asian financial crisis and the outbreak of SARS during the period 1998-2003, partly due to the lack of perfect flexibility by banks to adjust their factor inputs in response to falling outputs. Nevertheless, the cost efficiency has started to improve by 2004 Q1, along with the recovery of the economy, and with the adjustments and streamlining by banks beginning to bear fruit. Empirical results also indicate that cost efficiency is positively correlated with bank size, suggesting large banks are on average more efficient than smaller banks.

Keywords: Hong Kong Banking, Cost efficiency, Stochastic frontier approach

JEL Classification: G14, G21, G28, L11, L22

Suggested Citation

Wong, Jim and Fong, Tom and Wong, Tak-Chuen and Choi, Ka-fai, The Cost Efficiency of Commercial Banks in Hong Kong (September 13, 2006). Available at SSRN: https://ssrn.com/abstract=1032506 or http://dx.doi.org/10.2139/ssrn.1032506

Jim Wong (Contact Author)

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Tom Fong

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre, Central
Hong Kong
Hong Kong

Tak-Chuen Wong

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Ka-fai Choi

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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