Do Mergers Improve the Efficiency of Banks in Taiwan?: Evidence From Stochastic Frontier Approach

Banking consolidation is a global trend, but in Taiwan, after the failure of the Second Financial Reform, it does not have a clear policy for bank mergers. This paper investigates whether mergers influence the cost efficiency of banks in Taiwan, and our results suggest that the government should utilize market mechanism to encourage FHC or large banks’ mergers. We use the method of stochastic frontier approach (SFA) to investigate the uncertain relationship between merger and the cost efficiency of Taiwanese banks. Based on Battese and Coelli (1995), we use maximum likelihood estimation method to estimate the stochastic cost efficiency model and the inefficient model simultaneously. We find that, for Taiwanese banks, technology efficiency increases with time by lowering operation cost; cost efficiency decreases right after merger, and has to wait for three years to regain efficiency. The larger banks and FHC banks benefit more from cost savings than smaller banks.