Explaining Bank Efficiency Differences Between China and Taiwan by Meta-Frontier Cost Function

Abstract

The purpose of this paper is to employ the Meta-Frontier Cost Function to compare the efficiencies of banks in China and Taiwan over the period 2003–2009. Different from previous literature using loans and securities as the output variables in evaluating banking efficiency, we propose two new variables: interest income on loans and nonperforming loans, to identify whether the banks are both cost and profit efficient and to control the quality of loans. Evidence is found that the average cost efficiency of China's banks leads the Taiwanese banks with a significant gap. Some policy implications are provided accordingly.