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The influence of the market power of Chinese commercial banks on efficiency and stability

Xiangning Wang (Department of Statistics and Finance, The School of Management, University of Science and Technology of China, Hefei, China)
Xianming Zeng (Department of Statistics and Finance, The School of Management, University of Science and Technology of China, Hefei, China)
Zhiyang Zhang (Shenzhen Marketing Centre, Guosen Securities Company Limited, Shenzhen, China)

China Finance Review International

ISSN: 2044-1398

Publication date: 11 November 2014

Abstract

Purpose

The purpose of this paper is to estimate the cost and profit efficiency (PE) of Chinese commercial banks in the last ten years and investigate how market power affects bank efficiency and stability.

Design/methodology/approach

The paper builds a stochastic frontier analysis model to evaluate the cost and PE of commercial banks. The paper then uses a Lerner index and Z-index to represent market power and stability, respectively. In addition, the paper empirically analyzes the relationship between market power and bank efficiency, stability in the last ten years.

Findings

The results show that the efficiency of banks on the Chinese mainland increased during the study period, but is still lower than that of banks in Hong Kong; moreover, the efficiency of four state-owned commercial banks is lower than that of medium and small banks. Market power has a negative relationship with efficiency while its relationship with stability varies among Chinese banks.

Research limitations/implications

The results imply that the promotion of financial liberalization and banking reform to introduce an appropriate competition mechanism has had a positive effect on the efficiency and stability of Chinese commercial banks.

Practical implications

Thus, the paper will contribute to deepen reform and opening up the banking sector in China.

Social implications

The healthy development of banking can enhance the ability of banks to withstand financial risks, to promote the harmonious development of society.

Originality/value

The paper estimates the cost and PE of Chinese commercial banks using SFA model and investigates how market power affects bank efficiency and stability. The study design has a certain novelty, where Lerner index and Z index are used, respectively, to measure market power and stability and management efficiency of commercial banks is investigated from two aspects – PE and cost efficiency – by the translog cost function, instead of Douglas production function. In addition, the paper tries to put some of Hong Kong banks included in the study sample, and has a certain reference value.

Keywords

Acknowledgements

JEL Classifications — D40, E43, G21, L10

The authors would like to thank anonymous referees for their valuable comments and suggestions. The authors also thank International Science Editing for their excellent English editing. Any mistakes in this paper are the authors’ responsibility.

Citation

Wang, X., Zeng, X. and Zhang, Z. (2014), "The influence of the market power of Chinese commercial banks on efficiency and stability", China Finance Review International, Vol. 4 No. 4, pp. 307-325. https://doi.org/10.1108/CFRI-07-2013-0096

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited