The impact of transformation on economic efficiency – a case study of financial holding companies in Taiwan

Abstract

The present study examines the question of whether the transformation of Taiwan's banks into financial holding companies (FHCs) has led to an improvement in operating efficiency. The results indicate that while comparison of FHCs and banks shows that FHCs are significantly more efficient than non-FHC banks, if the comparison is made in terms of efficiency before and after conversion to FHC status, then no significant increase in total factor productivity (TFP) is seen after conversion to FHC status. The study's results indicate that while the transformation of some Taiwanese banks into FHCs has made these banks more competitive vis-à-vis other, non-FHC banks, the conversion to FHC status has not made any significant contribution towards these banks’ own efficiency growth. Government should keep encouraging the conversion of FHC banks, and, furthermore, stimulate the FHC banks on financial reform and overseas market expansion in order to elevate the efficiency of Taiwan financial industry.

Keywords:

• financial holding company
• efficiency
• DEA
• Malmquist index
• economies of scale

JEL Codes:

• C61
• G21
• L11

Acknowledgements

The views expressed in this paper is of the author and do not necessarily represent the Chung-Hua Institution for Economic Research. I thank an anonymous referee for the very thoughtful comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. For a more detailed description of the CCR model and BCC model, see Coelli (2005).

2. The DEA is a static model, used to calculate the relative efficiency of the units under evaluation over the same period; it does not permit comparison of efficiency across different time periods. However, if the average efficiency scores tend to rise and converge, this shows that the efficiency gap between each bank and the most efficient bank is gradually shrinking.

3. For the sake of brevity, Appendix 2 gives the rank order only for FHC banks; non-FHC banks are excluded, as they are not the main focus of the present study.

Additional information

Notes on contributors

Ming-Tse Wu

Ming-Tse Wu has a PhD from the Economics Department of National Taiwan University. His major research field is Mainland China Economics development, Taiwan and Mainland China financial and market reform comparison. He currently works in the Taiwan Chuang-Hua Institution for Economic Research as an assistant researcher.