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Persistent and transient inefficiency: Explaining the low efficiency of Chinese big banks

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  • Fungáčová, Zuzana
  • Klein, Paul-Olivier
  • Weill, Laurent

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.

Suggested Citation

  • Fungáčová, Zuzana & Klein, Paul-Olivier & Weill, Laurent, 2018. "Persistent and transient inefficiency: Explaining the low efficiency of Chinese big banks," BOFIT Discussion Papers 16/2018, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2018_016
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    Citations

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    Cited by:

    1. Karlo Kauko, 2021. "The Vanishing Interest Income of Chinese Banks," Asian Economic Papers, MIT Press, vol. 20(3), pages 94-113, Fall.
    2. Fungáčová, Zuzana & Kerola, Eeva & Weill, Laurent, 2023. "Does bank efficiency affect the bank lending channel in China?," Emerging Markets Review, Elsevier, vol. 55(C).
    3. Kryzanowski, Lawrence & Liu, Jinjing & Zhang, Jie, 2023. "Effect of COVID-19 on non-performing loans in China," Finance Research Letters, Elsevier, vol. 52(C).
    4. Fungáčová, Zuzana & Kerola, Eeva & Weill, Laurent, 2021. "Does bank efficiency affect the bank lending channel in China?," BOFIT Discussion Papers 3/2021, Bank of Finland, Institute for Economies in Transition.
    5. Ivan Huljak & Reiner Martin & Diego Moccero, 2021. "Bank productivity in CESEE countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q2/21, pages 83-104.
    6. Xiang Chen & Xuping Zhang & Yujia Wang & Hairui Jia, 2022. "The risk‐adjusted profit productivity change in Chinese banks: A comparative analysis of the different type banks," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 523-532, March.
    7. El Moussawi, Chawki & Mansour, Rana, 2022. "Competition, cost efficiency and stability of banks in the MENA region," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 143-170.
    8. Ivan Huljak & Reiner Martin & Diego Moccero, 2022. "The productivity growth of euro area banks," Journal of Productivity Analysis, Springer, vol. 58(1), pages 15-33, August.
    9. Maria Molinos-Senante & Alexandros Maziotis, 2022. "Decomposition of Cost Efficiency Into Persistent and Transient Efficiency in the Provision of Water Services: Evidence from England and Wales," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 36(6), pages 1849-1862, April.
    10. Maziotis, Alexandros & Molinos-Senante, Maria, 2022. "The impact of model specification and environmental variables on measuring the overall technical efficiency of water and sewerage services: Evidence from Chile," Structural Change and Economic Dynamics, Elsevier, vol. 61(C), pages 191-198.
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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