Three essays on cost efficiency, competition and cost-reducing innovation in Asian banking systems
Creators: name: Tran, Vo
Publisher: name: Loughborough University
Year: 2021
Subjects: subject: 149999 Economics not elsewhere classified
subject: FOS: Economics and business

description: This thesis consists of three separate empirical chapters that investigate key determinants of three important aspects of banking systems: cost efficiency, competition and cost-reducing innovation. We focus our analysis on Asian commercial banks. In the first empirical chapter, we analyse if and how cost efficiency of Vietnamese banks has increased from the early years of transition until the present day (1992-2017), and we evaluate a series of potential drivers of such changes. Using a one-step stochastic frontier analysis (SFA) approach, we find that increasing efficiency characterises the period of analysis with a sharp increase at the beginning. This increase is explained by the regulatory changes implemented during this period.In particular, efficiency is fostered by financial freedom and foreign penetration (after Vietnam significantly reduces the restrictions on foreign banks’ activities and entry). As a result of privatisations, reduction in the State’s protection, and technological spill-overs, we find that state-owned banks (SOBs) overtake foreign banks (FOBs) and become the best performing group for the post-global financial crisis (GFC) period. Finally, we observe technological improvements, helped by better capitalisation and increased asset diversification. Overall, we find supportive evidence of the effectiveness of the regulatory changes introduced by the government.As the single-country dataset does not allow comparing the performance of the banking systems among countries, in the next empirical chapters, we use a cross-country dataset to magnify the contribution of the thesis. In particular, the second empirical chapter focuses on bank competition in nine Asian countries after the Asian financial crisis from 2000 to 2016. We use two complementary measures of competition: the relatively new “competition efficiency” measure introduced by Bolt and Humphrey (2010, 2015a, 2015b), which we implement using an SFA model; and the Lerner index (with a dynamic panel model). The two measures provide consistent results that bank competition increases with market concentration, financial liberalisation, foreign penetration, foreign ownership, and competition from the stock market. Low inflation and secured property rights are favourable conditions for banks to gain market power. Over the examined period, competition tends to increase. However, a decrease is observed after the global financial crisis. Finally, in line with Bolt and Humphrey (2015b), we do not find a strong correlation between the two measures as they use different approaches to gauge competition.In the last chapter, we estimate a one-step stochastic meta-frontier to measure cost-reducing innovation and examine its determinants. We use the same sample of the second chapter, except Singapore. In line with the theoretical models of Aghion and Griffith (2005) and Aghion et al. (2005), we find an inverted-U shape relationship between competition and innovation. Initially, competition fosters innovation. However, after competition surpasses an “optimal” level, the opposite effect is observed. This finding is robust over different measures of competition. In the chapter we deepen the analysis to also look separately at different output markets. Our evidence shows that the key driver of innovation is competition in the credit market; competition in the other earning assets market affects innovation but to a lesser extent, while competition in the fee-based service market has no impact. The insignificant effect of competition in the fee-based service market may be because competition in this market (with the recent emergence of mobile money in Asian countries) is more likely to encourage innovation in a form of new products for example new payment cards/apps (rather than cost-reducing innovation). Besides competition, banking innovation is favourably influenced by financial freedom, foreign penetration, and bank size. We find no significant impact of market concentration, the GFC and bank ownership. Finally, our result suggests that banks can reduce their total costs by 9% on average if they adopt the best available global technology.The empirical evidence from the three chapters shows consistent positive effects of financial freedom and foreign entry on all three key aspects of banking examined: efficiency, competition and innovation. This suggests that governments should continue to implement de-regulatory policies with further opening to foreign banks. Furthermore, as we do not find any negative effects of market concentration, the results support restructuring policies that merge banks to eliminate weak performers from the system.