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An Empirical Analysis on the Risk-Adjusted Cost Efficiencies of Commercial Banks in China

Author: KangZuo
Tutor: LiangYan
School: Dalian University of Technology
Course: Finance
Keywords: Cost efficiency Risk-adjusted SFA (Stochastic Frontier Approach)
CLC: F224
Type: Master's thesis
Year: 2009
Downloads: 299
Quote: 0
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Abstract


Efficiency is a concentrated embodiment of commercial bank’s competition. Improving bank efficiency is a key to lead the banking sector to be more sustainable development, also a core of Chinese deepening financial reform. Considering unprecedented competitive environment, enhancing efficiency to alleviating the pressure of competition is an effective means. Under the condition of increasingly drastic competition inside and outside banking with non-banking financial institutions, risks become important factors that affect banking stability. Therefore, study on risk adjusted efficiencies of commercial banks in China is of great theoretical and practical significance.The paper is divided into five chapters. The first chapter is about the issue selection gist, relative research review, research approach and research content. The second chapter is the theory analyze. In this chapter, the concepts such as cost efficiency and banks’ risk are defined. At the same time, the paper analyzes the effect mechanism of banks’ risk to the cost efficiencies. We establish a model to estimate the risk-adjusted cost efficiencies applying SFA in the third chapter. The fourth chapter applies model established in the third chapter and estimates the cost efficiencies separately adjusted by the credit risk, fluid risk and financial risk of 14 commercial banks in China, from 1996 to 2007. It also compares the 4 state owned commercial banks with the 10 joint-stock banks. Based on the results and the actual facts in China, the fifth chapter gives reasonable suggestions on how to heighten the cost efficiency and resist risks for governor and policy maker.The paper gets the conclusion as follows through the empirical research. From the year 1996 to 2007, the risk-adjusted cost efficiencies of 4 state owned commercial banks range from 21.6% to 57.3%; the 10 joint-stock commercial banks range from 25.7% to 44%. By risk-adjusted cost efficiencies evaluation of 14 commercial banks in China, the paper finds that risks in commercial banks affect their cost efficiency mostly. The higher risks are, the lower efficiencies in commercial banks. There is little difference in the value of cost efficiencies between state owned commercial banks and joint stock banks, the state owned commercial banks are better than joint stock banks in their abilities on controlling risks. The paper also finds that commercial banks in China have potentiality in reducing cost and in enhancing the risk management level for them.The innovations in this paper can be described in two aspects as follows: Firstly, we establish a model to estimate cost efficiencies separately adjusted by the credit risk, fluid risk and financial risk of 14 commercial banks in China, from 1996 to 2007.Secondly, this paper analyzes the effect of the credit risk, fluid risk and the financial risk to the cost efficiencies of commercial banks in China, and it also compares the 4 state owned commercial banks with the 10 joint-stock banks.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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