The effects of risks and environmental factors on bank cost efficiency: A study in East Asia and Pacific region

Figures & data

Table 1. Unbalanced panel data descriptions

Year	Numbers of observations	Numbers of banks	Area	Numbers of observations	Numbers of banks
2003–2012	2378	247	East Asia & Pacific area	2378	247
2003–2007	1154	247	Developed economies	1046	108
2008–2012	1224	247	Developing economics	1332	139
2003	202	247	Australia	108	13
2004	217	247	New Zealand	36	4
2005	240	247	Hong Kong	175	18
2006	247	247	Japan	500	50
2007	247	247	Korea	160	16
2008	247	247	Singapore	67	7
2009	247	247	China	251	26
2010	247	247	Indonesia	337	34
2011	246	247	Malaysia	203	21
2012	237	247	Philippines	184	19
			Thailand	198	20
			Vietnam	159	19

Note: This table shows the number of observations and banks in the unbalanced panel data of East Asia and Pacific area over 2003–2012 period.

Table 2. Variable definitions for estimating cost efficiency

Variable	Definitions
TOTALCOST	Total interest expenses and non-interest expenses
TOTALLOAN	Total loans
OEASSET	Other earning assets
TOTALDEPOSIT	Total short-term deposits and long-term deposits
TOTALASSET	Total assets
LIQUIDASSET	Liquid assets
PCAPITAL	Price of capital—ratio of non-interest expenses to total fixed assets
PFUND	Price of fund—ratio of interest expenses to total deposits

Note: This table defines all variables used in estimating the cost-efficiency scores.

Table 3. Sample descriptive statistics of variables used in estimating cost efficiency (2003–2012)

	Full sample			Developed economies			Developing economies
	Mean	Min.	Max.	Mean	Min.	Max.	Mean	Min.	Max.
TOTALCOST (in thousand US$)	2,211,279	1,182	72,900,000	2,739,106	7,895	33,800,000	1,796,785	1,182	72,900,000
Output quantities (in thousand $US)
GROSSLOAN	47,600,000	27	1,360,000,000	64,400,000	28,886	917,000,000	34,400,000	26	1,360,000,000
OEASSET	34,800,000	0	1,330,000,000	47,100,000	2,082	904,000,000	25,200,000	0	1,330,000,000
TOTALDEPOSIT	77,500,000	12,925	2,490,000,000	104,000,000	95,071	1,770,000,000	56,800,000	12,925	2,490,000,000
LIQUIDASSET	14,100,000	4,180	728,000,000	148,000,000	8,545	388,000,000	13,600,000	4,180	728,000,000
TOTALASSET	88,100,000	29,380	2,790,000,000	121,000,000	154,604	2,010,000,000	62,400,000	29,380	2,790,000,000
Input prices
PCAPITAL	5.3339	0.0285	810.9945	8.1459	0.1179	810.9945	3.1257	0.0285	184.5000
PFUND	0.0277	0	0.1967	0.0174	0	0.1111	0.0359	0.0001	0.1967

Note: This table reports the minimum, maximum, average of all variables, which are defined in Table 4.2. All nominal monetary variables are transferred to the 2005 price level. The data source is Bankscope Database.

Table 4. Variable definitions for testing the relationships between bank cost efficiency and risks

Variables	Definitions
LLRGL	The ratio of loans loss reverses to gross loans
ETA	The ratio of equity to total assets
ROAV	The volatility of return on assets (ROA)
CDTA	The ratio of cash and due from bank to total assets
CPI	Consumer price index
IR	Interest rate
GDP	Gross domestic product (purchasing power parity) per capita
REGULATION	Capital ratio requirement
EQUITY	Total equity
LIQUIDRATIO	The ratio of liquid assets to total liabilities
YCRISIS	Dummy variable for the specific event: financial crisis 2008. It takes value “0” for the period before 2008, and value “1” for the remaining years from 2008.
DEVLOP	Dummy variable for two groups of countries: developed and developing. It takes value “0” for developing countries, and value “1” for the other group—developed countries.

Note: This table defines all variables used in testing the relationships between risks measures and cost efficiency.

Table 5. Statistics of variables used in testing the relationships between risks and cost efficiency

	Full sample			Developed economies			Developing economies
	Mean	Min.	Max.	Mean	Min.	Max.	Mean	Min.	Max.
Risks measures
LLRGL (%)	3.125	0.005	80.149	1.436	0.015	15.639	4.452	0.005	80.149
ETA (%)	8.729	−27.489	74.123	7.104	−16.881	42.957	10.005	−27.489	74.123
ROAV	0.411	0	43.699	0.255	0	14.187	0.533	0	43.699
CDTA (%)	5.396	0.000035	98.313	4.251	0.0009	74.062	6.295	0.000035	98.313
Control variables
CPI (%)	3.465	−2.6	25	1.304	−2.6	25	5.164	−0.9	23.1
IR (%)	4.232	0	15	1.835	0	8.4	6.115	0.3	15
GDP (US$)	18,494	796	60,799	34,357	1,146	60,799	6,037	796	16,794
REGULATION (%)	5.905	3	8	5.65	3	8	6.104	3	8
Instrument variables
EQUITY (in thousand $US)	5,196,780	−99,600,000	179,421,710	7,249,949	−6,510,110	113,000,000	3,584,458	−-99,600,000	179,000,000
LIQUIDRATIO (%)	20.162	0.138	189.982	13.039	0.138	114.175	25.756	0.355	189.982

Note: This table reports the average, minimum, and maximum of all variables, which are defined in Table 5.1. The data sources are Bankscope, WorldBank, and IMF Database.

Table 6. Summary of cost-efficiency estimations of separated economies of East Asia & Pacific area over 2003–2012 period

COSTEFF of	Mean	Std. Dev.	Min.	Max.
East Asia & Pacific area	0.6226	0.2423	0.0025	0.9808
Developed economies	0.5153	0.2936	0.0254	0.9808
Australia	0.8187	0.1334	0.1315	0.9415
New Zealand	0.8565	0.0192	0.8177	0.9155
Hong Kong	0.6446	0.1751	0.1689	0.8732
Japan	0.2801	0.2055	0.0254	0.9031
Korea	0.7782	0.0855	0.3523	0.9808
Singapore	0.6282	0.2458	0.0794	0.9647
Developing economies	0.7063	0.1459	0.0025	0.9714
China	0.7329	0.0899	0.4371	0.9171
Indonesia	0.7319	0.1018	0.4021	0.9714
Malaysia	0.7174	0.1675	0.0025	0.9576
Philippines	0.5941	0.1358	0.1819	0.8526
Thailand	0.6014	0.1525	0.0360	0.8648
Vietnam	0.8603	0.0350	0.7381	0.9286

Note: This table reports the summary statistics of cost-efficiency scores (COSTEFF) across economies in East Asia and Pacific area over 2003–2012 period.

Table 7. Means of cost-efficiency estimations of economies of East Asia & Pacific area across years

Mean of COSTEFF	2003–2007	2008–2012	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
East Asia & Pacific area	0.6299	0.6159	0.5980	0.6014	0.6264	0.6501	0.6656	0.6564	0.6146	0.5976	0.6101	0.5996
Developed economies	0.6623	0.6471	0.5402	0.6377	0.6949	0.7046	0.7343	0.7177	0.6345	0.6228	0.6316	0.6286
Australia	0.6294	0.8171	0.1315	0.6210	0.7874	0.7906	0.8164	0.8171	0.8536	0.8721	0.8676	0.8432
New Zealand	0.8534	0.8573	0.8177	0.8841	0.8616	0.8441	0.8593	0.8573	0.8529	0.8675	0.8539	0.8447
Hong Kong	0.7274	0.7274	0.6161	0.6086	0.7738	0.8191	0.8194	0.7274	0.4420	0.4456	0.5779	0.6077
Japan	0.2942	0.3620	0.2330	0.2478	0.2685	0.3238	0.3979	0.3620	0.2935	0.2492	0.2219	0.2036
Korea	0.7518	0.8273	0.7753	0.7673	0.7155	0.7278	0.7730	0.8273	0.8196	0.8211	0.7726	0.7829
Singapore	0.7178	0.7153	0.6675	0.6976	0.7622	0.7220	0.7398	0.7153	0.5453	0.4812	0.4960	0.4897
Developing economies	0.7114	0.7017	0.7240	0.7156	0.6998	0.7115	0.7063	0.7087	0.6969	0.6849	0.7082	0.7096
China	0.7041	0.7450	0.7012	0.7188	0.6977	0.6888	0.7140	0.7450	0.7267	0.7320	0.7875	0.8091
Indonesia	0.7557	0.7042	0.8104	0.7580	0.7541	0.7531	0.7029	0.7042	0.7480	0.7099	0.7086	0.6749
Malaysia	0.7219	0.7166	0.7383	0.7292	0.7064	0.7044	0.7309	0.7166	0.7108	0.7138	0.6954	0.7345
Philippines	0.6562	0.5842	0.6704	0.6944	0.6766	0.6466	0.5929	0.5842	0.5865	0.5403	0.5035	0.4726
Thailand	0.5859	0.6316	0.5776	0.5301	0.5306	0.6398	0.6515	0.6316	0.5475	0.5335	0.6686	0.6980
Vietnam	0.8449	0.8708	0.8459	0.8632	0.8334	0.8365	0.8456	0.8708	0.8622	0.8799	0.8859	0.8686

Note: This table reports means of cost-efficiency scores (COSTEFF) of the economies in East Asia and Pacific area across years.

Figure 1. Cost efficiency for developed East Asia and Pacific economies over the 2003–2012 period.

Figure 2. Cost efficiency for developed East Asia and Pacific economies over the 2003–2012 period.

Table 8. Estimation results for the effects of risks on cost efficiency of economies in East Asia and Pacific area over 2003–2012 period

	Model (1)	Model (2)	Model (3)	Model (4)
Dependent variable—COSTEFF
Independent variables
LLRGL	−0.0015**			−0.0013**
ETA		−0.0064***		−0.0064***
ROAV		−0.0029**		−0.0021**
CDTA			−0.0012***	−0.0012***
TOTALASSET	0.1039***	0.1593***	0.1027***	0.1570***
TOTALDEPOSIT	−0.0734***	−0.1408***	−0.0717***	−0.1411***
CPI	0.0024***	0.0023***	0.0025***	0.0025***
IR	0.0158***	0.0153***	0.0155***	0.0154***
REGULATION	0.0207***	0.0237***	−0.0211***	0.0243***
GDP	0.0038	0.0107	0.0045	0.0115
YCRISIS	−0.0394***	−0.0337***	−0.0386***	−0.0342***
DEVLOP	−0.1727***	−0.1531***	−0.1719***	−0.1413**
Year fixed effects	YES	YES	YES	YES
Country fixed effects	YES	YES	YES	YES
Log likelihood	2156.895	2223.0837	2158.2574	2230.5633
Observations	2378	2378	2378	2378

This table reports the results of examining the relationships between three kinds of risk and cost efficiency. Models (1)—(3) examined the separate effects of respectively credit risk, operational risk, and liquidity risk, model (4) examined the total effects of three of risks on cost efficiency that estimated during the period 2003–2012. The measures of risks are LLRGL, ETA, ROAV, CDTA. There are six control variables, including TOTALASSET, TOTALDEPOSIT, CPI, IR, GDPLOG, REGULATION, and two dummy variables, including YCRISIS, DEVLOP.

* Significant at the 10% level.

** Significant at the 5% level.

*** Significant at the 1% level.

Table 9. Estimation results for the effects of risks on cost efficiency across economies in East Asia and Pacific area

	Developed economies						Developing economies
	Australia	New Zealand	Hong Kong	Singapore	Japan	Korea	China	Philippines	Indonesia	Malaysia	Thailand	Vietnam
LLRGL	−0.018*	−0.011	−0.021	−0.004	−0.007*	−0.014	−0.008***	−0.002	−0.002**	−0.001	0.003**	0.002
ETA	−0.011***	0.001	−0.001	−0.012***	−0.001	−0.005	−0.009***	−0.009***	0.003*	−0.012***	−0.002	−0.002**
ROAV	0.007*	0.006	−0.009	0.054	0.003	−0.009	−0.028	0.006	−0.001	−0.023**	−0.013	0.013
CDTA	−0.003	0.003**	0.003**	0.001	−0.003*	0.001	−0.001	−0.001	−0.004***	−0.001	−0.004***	−0.002***
TOTALASSET	0.135*	0.187***	0.298	0.462***	0.119	0.101***	0.524***	0.342***	−0.211**	0.060**	0.277*	0.262***
TOTALDEPOSIT	−0.023	−0.188***	−0.288	−0.425***	−0.088	−0.087**	−0.520***	−0.328***	0.247**	−0.054**	−0.225	−0.260***
CPI	−0.003	0.002	0.036***	0.020***	−0.034***	0.001	0.005*	0.005*	−0.003*	−0.001	−0.005	0.001**
IR	−0.001	−0.001	0.031***	0.069***	0.408***	0.006	−0.002	−0.003	0.008*	0.004	0.030***	0.001
REGULATION	0.008	0.000	0.155***	0.057	0.115***	0.051***	0.007	−0.025	0.000	−0.015	0.000	0.000
GDP	−0.384***	−0.069*	−0.167	−0.513***	0.372***	0.001	0.066***	−0.477***	−0.262***	−0.080	0.046***	0.213
Log likelihood	186.0185	107.8355	180.1397	70.2373	627.1776	185.4395	364.1614	223.9751	426.8603	195.9820	185.6297	365.4070
Observations	108	36	175	67	499	160	251	184	337	203	198	159

Note: This table reports the results of examining the relationships between three kinds of risk and cost efficiency (COSTEFF) across economies. We only focus on Model (4) which combines all kinds of risks into one model. The measures of risks are LLRGL, ETA, ROAV, CDTA. There are six control variables, including TOTALASSET, TOTALDEPOSIT, CPI, IR, GDPLOG, REGULATION. The economic development classification follows World Economic Outlook reported by the International Monetary Fund (2012).

* Significant at the 10% level.

** Significant at the 5% level.

*** Significant at the 1% level.

Table 10. Estimation results for the effects of risks on cost efficiency divided by developing and developed economies in East Asia and Pacific area

	Developing countries				Developed countries
	Model (1a)	Model (2a)	Model (3a)	Model (4a)	Model (1b)	Model (2b)	Model (3b)	Model (4b)
Dependent variable—COSTEFF
Independent variables
LLRGL	−0.0006***			−0.0004***	−0.0203***			−0.0253***
ETA		−0.0062***		−0.0062***		−0.0062***		−0.0081***
ROAV		−0.0034***		−0.0031***		−0.0002		0.0031
CDTA			−0.0009**	−0.0010***			−0.0009	−0.0010
TOTALASSET	0.0787***	0.1341***	0.0767***	0.1319***	0.1144***	0.1828***	0.1231***	0.1899***
TOTALDEPOSIT	−0.0654***	−0.1325***	−0.0637***	−0.1320***	−0.0652**	−0.1400***	−0.0718**	−0.1548***
CPI	0.0015*	0.0015**	0.0015*	0.0016**	0.0080***	0.0069***	0.0080***	0.0069***
IR	0.0124***	0.0119***	0.0122***	0.0120***	0.0439***	0.0355***	0.0364***	0.0325***
REGULATION	0.0005	0.0050	0.0001	0.0059*	0.0740***	0.0692***	0.0695***	0.0755***
GDP	0.0097	0.0156**	0.0099	0.0160**	−0.0399	0.0164	0.0017	−0.0240
Country fixed effects YES		YES	YES	YES	YES	YES	YES	YES
Log likelihood	1293.4006	1357.4021	1295.4984	1360.9813	974.15341	966.87653	957.96432	991.98627
Observations	1332	1332	1332	1332	1045	1045	1045	1045

Note: This table reports the results of examining the relationships between three kinds of risk and cost efficiency (COSTEFF). Models (1a,b)—(3a,b) examined the separate effects of respectively credit risk, operational risk, and liquidity risk, model (4a,b) examined the total effects of three of risks on cost efficiency that estimated during the period 2003–2012. Series (a) models examined the effects for group of developing countries, and series (b) for the other group—developed countries. The measures of risks are LLRGL, ETA, ROAV, CDTA. There are six control variables, including TOTALASSET, TOTALDEPOSIT, CPI, IR, GDPLOG, REGULATION.

* Significant at the 10% level.

** Significant at the 5% level.

*** Significant at the 1% level.

Table 11. Estimation results for the effects of risks on cost efficiency of economies in East Asia and Pacific area for the pre- and post-global financial crisis 2008

	Full sample		Developed economies		Developing economies
	Pre-2008	Post-2008	Pre-2008	Post-2008	Pre-2008	Post-2008
LLRGL	−0.0017***	0.0005	−0.0227***	0.0107	−0.0012	0.0019
ETA	−0.0038***	−0.0034***	−0.0072***	−0.0098***	−0.0045***	−0.0025**
ROAV	−0.0054***	−0.0022	−0.0054	0.0256**	−0.0038	−0.0037***
CDTA	−0.0016***	−0.0011**	−0.0028**	−0.0006	−0.0012**	−0.0011**
TOTALASSET	0.1687***	0.1389***	0.4519***	0.1710***	0.1335***	0.1340***
TOTALDEPOSIT	−0.1541***	−0.1229***	−0.4154***	−0.1460***	−0.1256***	−0.1274***
CPI	−0.0003***	0.0068***	0.0207***	0.0137***	−0.0014	0.0038***
IR	0.0290***	0.0149***	0.0160***	0.0169***	0.0225***	0.0092***
REGULATION	0.0491***	0.02490***	−0.0051	−0.0490	0.0290**	0.0442***
GDP	0.0133***	0.0210***	0.1206***	−0.1108**	−0.0799***	0.0308***
Log likelihood	1091.3593	1257.0114	526.9066	479.9259	660.5120	862.9133
Observations	1153	1153	505	540	648	684

Note: This table reports the results of examining the relationships between three kinds of risk and cost efficiency (COSTEFF) for the separated periods: pre- and post-global financial crisis. We only focus on Model (4) which combines all kinds of risks into one model. The measures of risks are LLRGL, ETA, ROAV, CDTA. There are six control variables, including TOTALASSET, TOTALDEPOSIT, CPI, IR, GDPLOG, REGULATION.

* Significant at the 10% level.

** Significant at the 5% level.

*** Significant at the 1% level.

Table 12. Results of testing for endogeneity

	F-test statistics	p-value	Decision
LLRGL_res	8.68	0.602	Not endogeneity
ETA_res	16.48	0.403	Not endogeneity
ROAV_res	4.89	0.214	Not endogeneity
CDTA_res	16.59	0.901	Not endogeneity

Note: LLRGL_res is the residual of LLRGL. ETA_res is the residual of ETA. ROAV_res is the residual of LROAV. CDTA_res is the residual of CDTA. This table reports results of the Durbin-Wu-Hausman tests. The residual value of every independent variable is obtained from the first procedure of the mentioned tests, and then used in the second procedure to test for endogeneity.

International Monetary Fund. (2012). World economic outlook (WEO): Coping with high debt and sluggish growth. Washington, D.C.: Author.

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