Three essays on bank technology, cost structure, and performance

This dissertation addresses the issues around the technology and cost structure in commercial banking industries in both industrialized economy (US) and transitional economy (China). In addition, internal and external factors that affect bank performance, in terms of technical change, technical efficiency and total factor productivity, are examined to provide policy and business implications to regulatory authorities and banking managers.; The first paper investigates the existence of strategic group and heterogeneous technology in the US banking industry. Two stages of analyses are conducted. First, cluster analysis is carried out to segment the US commercial banks into seven distinct strategic groups in terms of their product mix and allocation of inputs. The membership shifts across strategic groups during the sample period (1991--2000) are traced to explore the response of banks to the changes of market conditions and regulatory environments. Second, based on the segmentation by cluster analysis, we further investigate the production technology and cost structures for each strategic group in the US commercial banking industry. A system of cost function and derived share equations are used to estimate the technology for each group. The distributions of returns to scale and technical change for each strategic group are also examined. The results provide the evidence of the presence of distinct strategic groups and heterogeneous technologies in the US banking industry. We find returns to scale and technical change vary substantially across strategic groups. Based on our findings, we conclude that the traditional application of a single homogeneous technology to the entire industry is likely to misrepresent the US banking industry.; The second paper examines how and why the de novo banks in the US banking industry distinguish from their peer established banks. Using a selected sample data of 2001--2005, we find that a typical de novo bank has higher capital equity ratio, higher concentration in real estate loans, higher cost of deposits and labor, and higher average quality of loans as well. In terms of profitability (ROA), our observation on the de novo banks in recent years is consist with previous studies on the de novo banks active in the 1980s: negative earnings in first two or three years followed by substantial improvement in their profitability, though still lagging behind a typical established bank at least in their first eight years of operation. In order to link profitability with production process, we introduce a cost metafrontier model that enables us to compare technologies across different groups of banks by using measures of technology gap and global technical (cost) efficiency. Empirically, we find that improving cost efficiency leads higher profitability for the de novo banks. In contrast, this effect is absent for the established banks. Scale economy exhibits its most advantageous effects on the smallest new banks by improving their technology, cost efficiency and thus profitability, while these advantages of scale diminish with the increase in size and finally they disappear when bank size reaches certain level.; In the third paper, focus is shifted from industrialized economy (US) to transitional economy, China, where markets and institutional structures are different from those of developed countries. We employ an input distance function approach to analyze the impact of banking deregulations/reforms in China since early 1990s on the efficiency and the total factor productivity (TFP) change in Chinese banking industry. We find that the joint-equity banks are more efficient than the wholly state-owned banks (WSOBs). Furthermore, both the WSOBs and the joint-equity banks are found to be operating slightly below their optimal size, suggesting potential advantages of expansion of their businesses. Overall, TFP growth in Chinese banking industry was 4.4% per annum for the sample period 1993--2002. Joint-equit...