Bank Competition, Stability and Efficiency – The Case Study of Hong Kong Banking

Abstract

This paper investigates bank cost efficiency and analyses the relationships between bank competition, bank stability, and bank efficiency in Hong Kong over the period 2004 – 2014. The study employs various approaches to measure bank efficiency, bank competition and bank stability for the robustness checks of the results. Our findings suggest that bank competition is negatively related to cost efficiency whereas bank stability (measured by Z-scoreROAA) has a positive impact on cost efficiency. By contrast, effects of bank stability (measured by Z-scoreROAE) and credit risk on bank efficiency may be positive or negative when considering efficiency measured by different approaches. The bank size, listing status of banks, macroeconomic environments (including gross domestic product (GDP) growth, inflation, and global financial crisis) have positive effects on cost efficiency. On the contrary, revenue diversification and liquidity risk contribute to decreases in cost efficiency in this banking sector.