Determinants of Operational Efficiency in Asian Banking: A Two-stage Banking Model Analysis

Abstract

This paper applies a two-stage banking model to analyze the operational efficiency of 137 Asian banks. Tobit regression model is also used to investigate the effect under the different operating environment and the characteristics of banks on banking efficiency. The empirical results show that technical inefficiency in the production stage for all the Asian banks is caused by pure technical inefficiency. In the intermediary stage, the banks’ technical inefficiencies in China, Taiwan, and South Korea are mainly caused by pure technical inefficiency, whereas in Hong Kong, Malaysia, Thailand, Singapore and Philippines, it is caused by scale inefficiency. From the policy perspective, this study can help Asian banks recognize whether their competition edges lie in acting more as a producer or an intermediary. The findings can also provide important references for banks in Asian countries to deliberate upon the capacities and niche in order to improve their competitive position in the financial market.