IDEAS home Printed from
   My bibliography  Save this paper

The Cost Efficiency of Commercial Banks in Hong Kong


  • Jim Wong

    (Research Department, Hong Kong Monetary Authority)

  • Tom Fong

    (Research Department, Hong Kong Monetary Authority)

  • Eric Wong

    (Research Department, Hong Kong Monetary Authority)

  • Ka-fai Choi

    (Research Department, Hong Kong Monetary Authority)


Given banks' special role in channelling funds from savers to investors, their cost efficiency has a significant effect on the supply of credit and, in turn, on the overall economic performance. In addition, inefficiency would affect banks' earnings, thus hampering their ability to withstand shocks. The issue of banks' cost efficiency is therefore of interest to policy makers. Using the stochastic frontier approach and a panel dataset of retail banks, this paper assesses the cost efficiency of the banking sector in Hong Kong. The average cost inefficiency during the period 1992-2005 is found to be about 15% to 29% of observed total costs, which is largely in line with the experience of US and European banks. Cost efficiency is found to be correlated with macroeconomic conditions, with a significant rise in cost inefficiency triggered by the Asian financial crisis and the outbreak of SARS during the period 1998-2003, partly due to the lack of perfect flexibility by banks to adjust their factor inputs (labour, funds and capital) in response to falling outputs. Additional resources spent on risk control, new business initiatives and strengthening customer relationships may also have contributed. Nevertheless, the cost efficiency has started to improve by 2004 Q1, along with the recovery of the economy. This suggests also that the adjustments and streamlining by the banks in recent years may have begun to bear fruit. Empirical results also indicate that cost efficiency is positively correlated with bank size, suggesting large banks are on average more efficient than smaller banks. Efficiency is also observed to be sensitive to banks' business mix, with banks which focus more on lending business exhibiting a higher level of efficiency compared to banks that focus relatively less on loans. In addition, banks suffering from larger loan loss provisions are found to be less efficient, probably due to higher operational costs relating to credit risk and loan loss management.

Suggested Citation

  • Jim Wong & Tom Fong & Eric Wong & Ka-fai Choi, 2006. "The Cost Efficiency of Commercial Banks in Hong Kong," Working Papers 0612, Hong Kong Monetary Authority.
  • Handle: RePEc:hkg:wpaper:0612

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkg:wpaper:0612. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simon Chan). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.