Zuzana Fungacova (Bank of Finland): Are Chinese big banks really inefficient? Distinguishing persistent from transient inefficiency

Zuzana Fungacova (Bank of Finland): Are Chinese big banks really inefficient? Distinguishing persistent from transient inefficiency

Co-authors: Laurent Weill (University of Strasbourg) and Paul-Olivier Klein (University of Aberdeen)

Abstract

There is large evidence that the five largest state-owned banks in China (the Big Five) suffer from low cost efficiency. The objective of this paper is to investigate how overall inefficiency of Chinese banks is decomposed between persistent inefficiency and transient inefficiency. While persistent efficiency reflects structural problems, transient efficiency is associated with short-term events. We use the model from Kumbhakar, Lien and Hardaker (2014) based on the stochastic frontier approach to measure persistent efficiency and transient efficiency for a large sample of 170 Chinese banks over the period 2008-2015. We find that Big Five banks have lower cost efficiency on average than other Chinese banks, which results from lower persistent cost efficiency. Big Five banks do not significantly differ in transient efficiency from other Chinese banks over the period, even if their transient efficiency is more volatile. Our findings support the view that major structural reforms need to be implemented to enhance efficiency of Big Five banks.

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