Thanh Pham Thien Nguyen

How efficient is the banking system of Asia’s next economic dragon? Evidence from rolling DEA windows

Vietnam is now widely regarded as a rising economic star and the next economic dragon of Asia. Its banking system has played a key role in this stellar economic performance. Since 1990, Vietnam’s banking system has undergone significant changes which saw its composition transformed from being state banks only to now being both state as well as private banks, and has performed generally well in terms of growth, profitability and stability. But is it efficient? We conduct a dynamic analysis of the level and trend of the cost and profit efficiency of the Vietnamese banking sector over the period 1995 to 2011 taking into account the Asian and Global Financial crises. We use the Data Envelopment Analysis (DEA) Windows Analysis approach and adjust for bank size in calculating the average efficiency score of the banking system. Our empirical findings show that the cost and profit efficiency of the Vietnamese banking system averaged around 0.90 and 0.75, respectively, with the state banks being more efficient than the private banks and with efficiency experiencing an upward trend over the analysis period. Moreover, we find that the Global Financial Crisis (GFC) and Asian Financial Crisis (AFC) did not significantly affect the efficiency of the whole Vietnamese banking system.

Bank reforms and efficiency in Vietnamese banks: Evidence based on SFA and DEA

ABSTRACT This study examines the cost efficiency of Vietnamese banks from 2000 to 2014 in the first stage, and the selection and dynamic effects of two governance reforms, foreign partial acquisition and listing on the stock exchange, on the efficiency in the second stage. Empirical results from the two-stage Stochastic Frontier Analysis (SFA) are highly consistent with those from the two-stage Data Envelopment Analysis (DEA) . Specifically, the first-stage efficiency estimation indicates that the cost efficiency shows a slightly upward trend over the period 2000–2014, with the cost efficiency score being 0.93 and state-owned banks outperforming joint-stock banks (JSBs). The mixed process seemingly unrelated regression estimator which controls the potential endogeneity of public listing and foreign acquisition in the second stage shows that selection effects occur in the Vietnamese banking system: banks selected by the strategic foreign investors for partial acquisition and banks selected for public listing are more cost-efficient than those not selected. The short-term and long-term dynamic effects of foreign partial acquisition are documented: the cost efficiency of the Vietnamese banks post-partial acquisition is lower than prior-partial acquisition, and it experiences a decreasing trend since partial acquisition. However, the short-term and long-term dynamic effects of public listing are not evidenced: the cost efficiency of the banks after public listing is not statistically different from that before public listing, and it also reveals an unclear trend since public listing.

The interrelationships among default risk, capital ratio and efficiency: evidence from Indian banks

Purpose - – The purpose of this paper is to examine the interrelationships among default risk, capital and efficiency of the Indian banking system over 1990-2011. This study also took into account the impact of ownership on these interrelationships Design/methodology/approach - – This paper employed Data Envelopment Analysis (DEA) Windows Analysis to estimate efficiency levels and trends of individual banks. This paper then used a model of seemingly unrelated regression equations (SURE) to examine the interrelationships among default risk, capital and efficiency. Findings - – This study found a two-way negative association between efficiency and default risk, and between capital ratio and default risk. However, this study found a two-way positive relationship between capital ratio and only profit efficiency. Public banks behaved differently from private banks regarding the association between capital and efficiency. Moreover, public banks had greater probability of default risk, lower capital ratio but higher efficiency level than private banks. Further, default risk, capital ratio and efficiency of the Indian banking system increased over time, but the two formers were driven by public banks while the latter was driven by private banks. Practical implications - – The findings of this study appear to favour capital ratio as an efficient tool to improve efficiency and reduce default risk of the Indian banking system. Originality/value - – This paper is the first investigating the interrelationships between bank risk, capital and efficiency of the Indian banking system, where bank risk is measured by

The performance of the Chinese banking system before and after the WTO entry

Purpose - This study examines the effects of China’s accession to the WTO in January 2002 on the efficiency levels, efficiency components (technological change and scale economy), and efficiency determinants of Chinese banks. Design/methodology/approach - This study employs a two-stage Stochastic Frontier Analysis (SFA) to estimate efficiency and its components and identify the efficiency determinants. Findings - Chinese banks did not benefit from technological change and scale expansion in reducing costs in the pre-WTO period, but the reverse occurred in the post-WTO period. Chinese banks benefited from technological change in increasing profits to a lower degree in the post than the pre-WTO period. Cost efficiency declined while profit efficiency improved after China’s accession. Security investments positively drove profit efficiency in both pre and post-WTO periods. There was an efficiency gap between joint-stock banks and state-owned banks in the pre-WTO period, but this gap disappeared in the post-WTO period. Economic freedom was related negatively to cost efficiency and positively to profit efficiency in the pre-WTO period, but opposite relations occurred in the post-WTO period. Practical implications - These findings appear to favour gradual liberalisation in the Chinese banking system, gradual removal of restrictions on foreign banks, certain shift from non-security investments to security investments, technology investment and scale expansion. Originality/value - This is the first study investigating the impact of the WTO on the efficiency, technological progress, economy of scale and efficiency determinants in Chinese banks.

THE EFFECTS OF COMPETITION ON EFFICIENCY: THE VIETNAMESE BANKING INDUSTRY EXPERIENCE

Given considerable changes in the Vietnamese banking environment brought about by significant reforms towards liberalization during the last two decades, this study investigates the evolution of competition and efficiency, compares the competition and efficiency of state-owned banks to joint-stock banks, and then tests the “quiet life” hypothesis in this industry over the period 2000–2014. This study employs the efficiency-adjusted Lerner index (i.e., market power) to capture competition, and the cost efficiency estimated by a Fourier-flexible function stochastic frontier analysis (SFA) to capture bank efficiency. This study firstly finds a slight improvement of competition and cost efficiency in the Vietnamese banking sector over the analysis period. Secondly, there are no significant differences in competition and cost efficiency level between state-owned and joint-stock banks. Thirdly, a positive causality running from competition to cost efficiency is documented, providing evidence of supporting the “quiet life” hypothesis. Finally, positive efficiency effects of the banks’ capital ratio and size are found, while insignificant impacts of the growth of GDP per capita and 2007 global financial crisis were observed. The results are strongly robust to a variety of tests. The findings suggest pro-competition, pro-capitalization and pro-size expansion policies in the Vietnamese banking sector if targeting at improving the cost efficiency of Vietnamese banks.

Market concentration, diversification and bank performance in China and India: An application of the two-stage approach with double bootstrap

Purpose - The purpose of this paper is to examine the operational efficiency and effects of market concentration and diversification on the efficiency of Chinese and Indian banks in the 1997-2011 period. Design/methodology/approach - This study employs the two-stage bootstrap procedure of Simar and Wilson (2007) to obtain valid inferences on the efficiency scores and the efficiency determinants. Findings - Using data set for each country separately, the authors found that the bias-corrected cost efficiency displays an upward trend in Chinese and Indian banks. This trend is consistent with profit efficiency among Chinese banks, but the trend is unclear in Indian banks. Market concentration is negatively related to cost and profit efficiencies of Chinese banks. However, market concentration is positively associated with cost efficiency, but unrelated to profit efficiency of Indian banks. In Chinese banks, diversification of revenue, earning assets and non-lending earning assets are associated with increasing profit efficiency, but their effects to cost efficiency are not clear. In Indian banks, diversification of earning assets increases profit efficiency while there are cost efficiency losses from diversification of revenue and earning assets. Practical implications - Bank regulators and supervisors in China should consider establishing policies to reduce market concentration and encourage diversification of revenue, earning assets and non-lending earning assets, while increasing concentration and diversification of earning assets should be encouraged in Indian banks. Originality/value - To the best of the authors’ knowledge, this is the first study employing the double bootstrap procedure proposed by Simar and Wilson (2007) which can address the problem of the two-stage data envelopment analysis or SFA estimator in the efficiency literature on Chinese and Indian banks that efficiency scores obtained in the first stage are inter-dependent, and hence violating the basic assumption in regression analysis in the second stage.

Bank Reforms and Efficiency: Evidence from Vietnam, the Rising Star of Asia

Using DEA Window Analysis and Tobit regression for 30 Vietnamese banks over 1995-2011, we examine the effects of bank reforms on cost, revenue and profit efficiency. We find that state-owned banks (SOBs) are more efficient than joint-stock banks (JSBs). Banks selected by foreign investors are more cost-efficient and listed banks are less cost-efficient. Foreign acquisition reduced cost and profit efficiency in the long-run. Competition improved cost and profit efficiency of all banks, and narrowed efficiency gaps between SOBs and JSBs, banks with and without foreign acquisitions, and listed and non-listed banks over time. By 2009, competition closed some efficiency gaps.

Rethinking the Role of the State in Finance: Some Lessons from Vietnam's 'Socialist' System

The widespread failures in the financial sector during the Global Financial Crisis prompted many governments worldwide to re-intervene in a market that had become increasingly state-free over the years. The re-intervention, however, has re-ignited a global debate on the role of the state in finance. This paper seeks to contribute to that debate by demonstrating that intervention may not necessarily weaken bank performance and/or systemic stability. Indeed, in the case of Vietnam, a state-controlled system, bank performance, measured variously, was better or at least equivalent to that in the country’s more state-free neighbouring environments of Philippines, Thailand and Indonesia; it was also better or equivalent to that in a transition economy of China.