Financial liberalization and banking performance: an analysis of Taiwan's former ‘Top 10 Banks’

Abstract

This article examines, from a unique sample of once-oligopolized ‘Top 10 Banks’ in Taiwan between 1981 and 2001, the dynamic effect of cost-side efficiency structure and revenue-side market structure on performance gauged by the Return on Asset (ROA) and the Return on Equity (ROE). Financial liberalization with market reopening by the Taiwanese government in 1991 reduces ROA. Cost Efficiency (CE) and Allocative Efficiency (AE) assessed with Data Envelopment Analysis (DEA) increase procyclical ROA but are unrelated to ROE, suggesting effectiveness of cost control over productivity innovation for the ‘Top 10’ to maintain performance. Operation expansion merely aggravates hierarchical complexity. Market Share (MS) and Market Concentration (CR) behave oppositely and profit is unaffected by their interaction term, substantiating the standard efficient structure hypothesis and confirming inappropriateness of using MS as a proxy for efficiency. Under the trend towards universal banking, longer-term revenue generated from geographical and operational diversification, on balance, is likely to overweigh the cost linked with greater asymmetry of information in loan making.

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