Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks

30 Pages Posted: 27 Jul 2018 Last revised: 20 Aug 2018

See all articles by Zuzana Fungáčová

Zuzana Fungáčová

Bank of Finland - Institute for Economies in Transition (BOFIT)

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Paul-Olivier Klein

University of Aberdeen Business School; University of Strasbourg

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2018

Abstract

Considering the evidence that China’s five largest state-owned banks (the Big Five) suffer from low cost efficiency, this paper decomposes overall efficiency of Chinese banks into: persistent efficiency and transient efficiency components. Low persistent efficiency reflects structural problems, while low transient efficiency is associated with short-term problems. Using the model of Kumbhakar, Lien and Hardaker (2014) based on the stochastic frontier approach, we measure persistent efficiency and transient efficiency for a large sample of 166 Chinese banks over the period 2008–2015. In line with existing evidence, we find a lower average cost efficiency of Big Five banks compared to other Chinese banks. It is almost entirely due to low persistent cost efficiency. Big Five transient efficiency is similar to other Chinese banks. Our findings support the view that major structural reforms are needed to enhance the efficiency of China’s Big Five banks.

JEL Classification: C23, D24, G21

Suggested Citation

Fungacova, Zuzana and Weill, Laurent and Klein, Paul-Olivier, Persistent and Transient Inefficiency: Explaining the Low Efficiency of Chinese Big Banks (July 20, 2018). BOFIT Discussion Paper No. 16/2018, Available at SSRN: https://ssrn.com/abstract=3219786

Zuzana Fungacova (Contact Author)

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

Snellmaninaukio
PO Box 160
Helsinki 00101
Finland

HOME PAGE: http://www.bof.fi/bofit_en/index.htm

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

Paul-Olivier Klein

University of Aberdeen Business School ( email )

Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

University of Strasbourg ( email )

61, avenue de la foret noire
Strasbourg, Alsace 3000
France

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