Measuring state-owned commercial banks efficiency in China: a panel copula based stochastic frontier model

Abstract

This research aims to calculate and analyze the cost efficiency, profit efficiency, economies of scale and market power of the five large state-owned commercial banks in China in the past ten years. This study uses the Simultaneous Equation Stochastic Frontier Model (SFM), which has independent random noise and inefficiency term in a single equation. Also, this study uses copula function to join the error components and several equations together in a model. Compared with previous studies, this is the first time this method has been used to study the operational efficiency of large state-owned commercial banks in China.

In short, the purpose of this research is as follows: 1) To analyze the cost efficiency of China's large state-owned commercial banks 2) To analyze the profit efficiency of China's large state-owned commercial banks. 3) To measure Lerner Index (LI) and scale economies (SC). This research uses the annual data of employee salaries, the number of employees, operating expenditures, net fixed assets, interest expenses, deposits, owner’s equity, loans, interest income, and non-interest income of five large state-owned commercial banks in China (Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of China and Bank of Communications) from 2010 to 2019. Research and calculate the cost efficiency, profit efficiency, Lerner Index (LI) and scale economies (SC) of large state-owned commercial banks in different periods and conduct an in-depth analysis of the results.

The results of empirical research show that, in addition to BOCOM, China's large state- owned commercial banks have higher operating efficiency. The low market power of state-owned banks means that China's banking industry has a high level of competition. China's large state-owned commercial banks are in a state of diseconomies of scale, and their profits are decreasing year by year. Therefore, although large state-owned banks have generally higher operating efficiency, there is still room for improvement, and corresponding suggestions are given at the end of the article.