A Study Of Commercial Bank Cost Efficiency And Profit Efficiency In China Based On DFA

Improving bank efficiency is a key to prevent bank risks and lead the banking sector to be more sustainable development, also a core of China's deepening financial reform. In the financial markets, banks act as financial intermediaries, transfer funds from the supplier to demand. Improving the efficiency is vital for raising the financial resources distribution. Bank efficiency directly affects the operation of the national economy. Considering unprecedented competitive environment, enhancing efficiency to alleviating the pressure of competition is an effective means. Therefore, study on China's commercial banks efficiency is of great theoretical and practical significance.In a microscopic perspective, banking efficiency is to measure the level of minimizing the cost under a fixed output or the level of profit maximization under a fixed input. Based on that, we research on profit efficiency and cost efficiency of commercial bank. Cost efficiency is defined as a bank's cost how close to the cost level of the best bank under the same environment and the same premise outputs. Profit efficiency is defined as a bank how close to the extent that it could achieve the greatest possible profits when set specific efficiency refers to the input and output levels. Theory of X-efficiency and the new institutional economics are basis for our study. This paper uses Distribution Free Approach as a framework, using Translog function to estimate cost efficiencies and profit efficiencies of 14 Chinese commercial banks from 1999 to 2004. The mean cost efficiency of commercial bank was 82.43%. The mean profit efficiency was 54.25%. The mean cost efficiency and profit efficiency of shareholding banks were both higher than state-owned banks'. The profit efficiency is superior to the cost efficiency for evaluating the competitiveness and the performance of commercial bank. Endogenous and exogenous variables from the two levels of the variables affecting the efficiency of China's commercial banks variables analyzed. Endogenous variable, bank's organizational structure, and the quality of assets of banks and exogenous variable of information technology,banking market structure and regulatory policy influence the efficiency of banks more significantly .Therefore, it is wise to propose an appropriate concentration of diversified ownership structure, to strengthen the bank's capital and human resources management. Nevertheless, improving information technology, accelerating business innovation, establishing effective financial supervision and an appropriate competition is necessary to improve the efficiency in financial sector.