The banking sectors of the East Asian countries are homogenous for at least three reasons: Firstly, the commercial banks are predominant sources of financial assets, holding more than 80 percent of the region’s financial assets (Chan et al. 2015
). Secondly, the governments promote banking sector consolidation in the region through mergers/acquisitions to boost banking sector stability (Soedarmono et al. 2013
). Thirdly, the countries have liberalized their entry barriers for regional banks to promote regional banking integration through the adoption of regional integration frameworks, such as the Association of Southeast Asian Nations (ASEAN) Banking Integration Framework (ABIF) in March 2015, the ASEAN-China Free Trade Area (FTA) in January 2010 and the ASEAN Plus Three cooperation in December 1997. The ASEAN Plus Three cooperation includes China, Japan and South Korea (Chan et al. 2015
; Noman et al. 2018
). The banking sector liberalization and regional banking integration frameworks were initiated in order to promote competition and encourage banks to increase their operational efficiency (Noman et al. 2017
). In a competitive market, banks need to be efficient in order to enjoy competitive advantages over inefficient banks (Schaeck and Cihák 2014
). In addition, Kwack
) and Molyneux et al.
) indicated that operational inefficiency was among the leading causes of bank failure during the Asian Financial Crisis (AFC) and the global financial crisis (GFC). Consequently, the determination of East Asian banks’ operational efficiency has gained considerable attention from academics and policy-makers. Additionally, the GFC in both advanced and transition economies and the associated fiscal cost of crisis resolution (Honohan and Klingebiel 2003
) has generated a new wave of interest among researchers to re-examine bank efficiency.
Bank efficiency has already gained a considerable amount attention in banking literature, however, most studies focus on the United States and other developed Western countries (such as Athanasoglou et al. 2008
; Fries and Taci 2005
; Heffernan and Fu 2010
; Nurboja and Košak 2017
; Qin and Pastory 2012
, among others). In recent years, several studies have been undertaken on different issues relating to the efficiency of East Asian banks, but most of them have been focused on a single country. Dacanay
) and Manlagñit
) in the Philippines, Sufian
) in Malaysia and Margono et al.
) in Indonesia focused on the effect of the AFC on bank efficiency. Another group of studies by Berger et al.
) in China, Parinduri and Riyanto
), Margono et al.
), Hadad et al.
) and Hadad et al.
) in Indonesia, Matthews and Ismail
) in Malaysia, and Vu and Nahm
) in Vietnam focused on the effect of ownership structure on efficiency. Zhang and Matthews
) focused on post-AFC efficiency convergence in Indonesia, and Chen et al.
) investigated the effect of Chinese banking reform on efficiency, while Dong et al.
) estimated cost efficiency in China. In addition, Sufian and Habibullah
) investigated the effect of mergers and acquisitions on the efficiency of banks in Malaysia. In another study, Sufian and Habibullah
) investigated the determinants of efficiency in banks in Thailand.
Cross-country bank efficiency studies in East Asian countries are still scarce in the literature. Abd Karim
) made the first attempt in determining the bank efficiency of four East Asian countries: Indonesia, Malaysia, the Philippines and Thailand. In another study, Williams and Nguyen
) investigated financial liberalization and profit efficiency in AFC-affected countries, such as Indonesia, Malaysia, the Republic of Korea and the Philippines. In addition, Thoraneenitiyan and Avkiran
) investigated the role of consolidation and liberalization on efficiency in Indonesia, Malaysia, the Philippines, Thailand and Korea, while Sufian
) investigated the effect of the AFC on technical efficiency in Malaysia and Thailand. Most recently, Chan et al.
) investigated the effect of market structure and institutional quality on efficiency in Indonesia, Malaysia, the Philippines, Singapore and Thailand.
The present study aims to determine the efficiency of banks and the determinants of said efficiency across East Asian countries, especially ASEAN-61
countries and China (hereafter Sino-ASEAN). This is due to the fact that the cross-country comparison of bank efficiency enables us to answer fundamentally essential research questions, such as: Do countries differ in terms of their banking efficiency? This study goes beyond the scope of previous cross-country studies in East Asia, incorporating China into the cross-country study. The findings of this study would be interesting for investors and policymakers in the region, particularly in the context of the full execution of the ASEAN-China FTA and the ASEAN Plus Three cooperation. In addition, cross-country efficiency information in the region is crucial for regional banks in order to move across the region by establishing foreign branches in other countries within the region. The ASEAN banking integration framework, the ASEAN-China FTA and the ASEAN Plus Three cooperation will intensify both regional banking integration and banking market competition in the region. The Asian Development Bank (ADB 2013
) identified that diversity is the main characteristic of East Asian banks which is different in the form of the size of economy, industrial structure and stage of economic development. Economic diversity may influence large regional banks from relatively developed countries with comparatively low profit margins to move to comparatively less developed countries with a relatively high profit margin (Noman et al. 2017
). This study further estimates the effect of the GFC on the efficiency of commercial banks in China and ASEAN countries. This is important to identify whether a given bank suffered from the GFC due to inefficiencies in the region.
This study contributes to banking literature in a number of ways. The study enhances the literature on estimating and comparing the technical efficiency of Sino-ASEAN banks, especially during the GFC period. Firstly, this study estimates the efficiency of Sino-ASEAN countries using a non-parametric data envelopment analysis (DEA) approach. Secondly, it uses second step analysis by estimating the bank specific and country specific determinants on bank efficiency using Tobit regression and Simar and Wilson
) double bootstrapping regression. Thirdly, it incorporates the geographical location effect to investigate the role of location on efficiency in the region. Fourthly, it examines the effect of the GFC on efficiency. The study finds that Chinese banks dominate the Sino-ASEAN efficiency frontier regardless of the period, suggesting that Chinese banks outperform ASEAN countries’ banks in terms of efficiency, though the efficiency of Chinese banks has sharply declined over the GFC period. Our results also support the hypothesis that location or the banking market has an important and significant role in explaining banking sector efficiency in the Sino-ASEAN region. The significantly positive location coefficients in our model suggest that during the pre-crisis period, banks belonging to China and Indonesia were more likely to be efficient due to the location effect. We found the same tendency among Chinese banks in the crisis period as in the period before the crisis.
The rest of the paper comprises the following sections: Section 2
discusses the data and methods, Section 3
presents the results and discussion, and the final section deals with our conclusion and recommendation.
4. Conclusions and Recommendation
The main objective of this paper was to assess the importance of the geographical location effect on banking sector efficiency in the Sino-ASEAN region. We extended our analysis further by studying the significance of the geographical effect during and around the global financial crisis. DEA based efficiency scores were first derived as a proxy to banking sector efficiency across the region to be evaluated through Tobit regression and the Simar and Wilson
) double bootstrapping method.
The results suggest that Chinese banks have a dominating power in the formulation of the frontier. After China, Malaysian banks contribute most to the efficiency frontier, followed by Singapore. The contribution of Chinese banks in the efficiency frontier matters a lot. Although the Chinese banking sector is outperforming the ASEAN banking sector in terms of efficiency, the Chinese banking sector efficiency sharply declines over the period. Hence, the overall efficiency frontier is contracting and China is driving that contraction. The results clearly indicate the significance of country-specific factors in explaining banking sector efficiency across the region. One of the contributions of this paper was to assess the role of country-specific aspects during and around the global financial crisis. Our piecewise regression for the pre-crisis, crisis and post-crisis periods suggests that the geographical location effect was a significant determinant of banking sector efficiency throughout the period of our analysis. The results indicate that much of the variation in the efficiency of banking markets in the Sino-ASEAN region are due to the geographical location and country-specific factors. Similar to the findings of earlier studies in Europe (Pastor et al. 1997
), our study confirms the role of country-specific factors as the major determinants of banking efficiency level across the Sino-ASEAN region. Xue and Harker
) identified the dependency problem in DEA based scores, which contradicts with the basic regression model. The presence of a dependency problem thus may lead to unverifiable results. Following the authors’ suggestion, bootstrapping and double bootstrapping were used to overcome this problem. The results, however, were consistent with the direct Tobit regression.
Policymakers, regulators and investors should closely monitor the performance of banking in the Sino-ASEAN region. Although China and Singapore are performing better as compared to other countries in the region, policymakers and regulators should be more vigilant while following the strategic policies of liberalization, regulation and consolidation in these two countries. Policymakers might place emphasis on mitigating non-performing loans and special mention loans that may potentially reduce the efficiency level of Chinese banks. In the ASEAN region, which consists of countries with different stages of economic and financial development, there also exists a big problem in the harmonization of regulations, in terms of which criterion should be based. To accommodate the various risks entailed in the harmonization process, it will be necessary to allow some room for flexibility to member states. For instance, when the entry criteria of foreign banks may be too liberal to some of the member states, there will be a risk that foreign banks with loose risk management will be allowed to enter into such countries, destabilizing the financial system of them. In such a case, it may become necessary for them to take some discriminatory treatments (from domestic banks), depending on the risk management capacity of the entering banks. On the other hand, in the case of a country with a less developed financial market, there is a risk that its domestic market will be dominated by foreign banks. In this case, there will be a need to allow the country to put off the entry liberalization schedule or put a ceiling on the share of foreign banks in the domestic market. This research can be extended further by analyzing the dynamic relationship of the regulatory framework, ownership structure and bank efficiency in the Sino-ASEAN region, as well as other Asian countries.