Cost Efficiency of Domestic and Foreign Banks in Thailand: Evidence from Panel Data

The paper estimates and compares cost efficiency of domestic and foreign banks in Thailand by using bank-panel data between 1995 and 2003. It also examines the effect of foreign bank entry on banking efficiency in Thailand since the significant acquisitions by foreign banks after the 1997 financial crisis. The widely used translog functional form specification is statistically tested by pooled regressions. The estimated results suggest that the unit costs of production of domestic and foreign banks are indistinguishable, although the two types of banks focus on different areas of the banking business. The findings suggest that based on bank operating efficiency, if foreign banks represent the best-practice banks in the industry, to a large extent, domestic banks in Thailand have caught up to the best-practice standards throughout 1995-2003, significantly after the 1997 financial crisis . This may be due to greater foreign participation through acquisitions, which increases the competitive pressure in the banking industry, and also to financial restructuring of domestic banks, which increases the cost efficiency of domestic banks, thereby benefiting banking customers.