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The Analysis Based on Economies of Scale in Chinese Commercial Banks

Author: HuJunHua
Tutor: JiangXuan
School: Central University of Finance
Course: National Economics
Keywords: Scale of economies China Bank Industry Translog Cost Function
CLC: F832.33
Type: Master's thesis
Year: 2006
Downloads: 562
Quote: 2
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Abstract


Based on the theoretical analyses of scale economies for the banking industry, this paper examines China’s situation empirically. Scale economies of the banking describe the relationship between scale and cost-revenue. The relevant research can explain not only the present banks’ mergers and takeovers, but also the hybrid operation-of financial industry.Scale economies are a theoretical and empirical problem, which requires theoretical analyses and the corresponding empirical tests. Referring to a lot of papers, we know that, although so many researches had done with different methodologies since 1950th, there is no approximate conclusion in this study. But we got some basis conclusion which is support by most of researchers.In this paper, we begin with the theory of scale of economies. Then, by comparing other industries, we state the rule of scale economies for the banking industry, which lays bases on the methodology of empirical testing. Followed, we list all likely reasons for this phenomenon. After this, we compare different methodologies in the study of scale economies for bank industry, and then we choose translog cost function to carry our test. We use the data of 14 banks between the year 1999 and 2004 as our sample and get some conclusion. The empirical tests shows, during the period, four state-owned banks prove to be lightly diseconomies, while parts of join-stock banks behave economies. Some of them show apparently economies, such as China Merchants Bank, Bank of Communication, Shanghai Pudong Development Bank and Citic Industrial Bank. Along with time, the economies will come down, partly because of the upgrade of the technique. By researching in group, we find that the most efficient deposit scale of China’s Bank Industry is between 150 and 250 billion Yuan, while excluding this field are diseconomies. The scale of economies in deposits is larger than in loans, possibly lies in the high badness loans of the banks. We then compared the conclusions of China’s commercial banks we have got with the developed countries and then analyze the reasons.Bases on the above work we have done, we obtain implications for China as following: firstly, deregulating controlling on banks, especially the entry regulation and Encouraging the establishment of the private banks and foreign banks to make banks more competitive and more efficient. Secondly, accelerating the property reform for the commercial banks and putting their property rights in order. Thirdly, we should reform the selecting system of banking managers and use market to select excellent mangers. Fourth, improving the bankingmergers to a certain extent, and then realizing the mix operation and gain scale benefits and their anti-risk ability. Finally, informational investment should be strengthened to increase gains from technology.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks > Commercial banks ( specialized banks )
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