The Efficiency of Commercial Bank Mergers in Taiwan: An Envelopment Analysis

Article excerpt

The universal banking system has made it imperative for Taiwan banks to merge. The study employed the two-stage method to analyze the 1997-1999 data of 43 commercial banks in Taiwan. The first stage employed the DEAP Version 2.1 software of Tim Coelli, where (data envelopment analysis, DEA) was used to measure the operating efficiency of each bank. The second stage employed the SAS software, where the Tobit regression method was used to analyze the effects of bank mergers on the operating efficiency of banks. The empirical findings revealed: (1) generally, bank mergers tend to upgrade the technical efficiency, allocative efficiency, and cost efficiency of banks; however a yearly decline was noted in allocative efficiency and cost efficiency. (2) In terms of technical efficiency and allocative efficiency improvement, the effect of bank mergers was significant; however, in terms of cost efficiency improvement, the effect was insignificant.

I. Introduction

A review of the 20th Century business growth performance reveals record highs in the number of cases and the total dollar value paid involved in corporate mergers and acquisitions (abbreviated M&A). The Economist described the future of corporate M&A : "small is no longer beautiful, now big is beautiful. " The M&A wave also swept the banking industry. In 1998, Travelers Group and Citibank merged to form the biggest financial department store; Deutsche Bank (Germany) and the Bankers Trust Company (US) merged to become the world's largest bank. The following year, Kogyo Bank (Japan), Fuji Bank (Japan) and the Dai-Ichi Kangyo Bank Ltd. announced their merger to form the Mizuho Holdings Corp. in an effort to become the world's largest bank. As size became the new trend in the banking industry, the global banking map began to undergo rapid changes. Last year, the Chase Manhattan Bank (US) merged with Morgan Bank (US) and Citibank Group merged with First Capital Co. mergers; they ranked fifth and sixth in the 2000 top ten largest M&A. The international bank mergers manifested how weaker players are being weeded out; large corporations stay large.

A look into the Taiwan banking environment revealed strict government control during the early period. The banking industry of Taiwan did not have a complete banking system for development; it also lacked reliable institutions and credible indices for bank management and operating performance evaluation puiposes. Since 1991, the Ministry of Finance (MOF) licensed the establishment of sixteen new banks, afterwards, the MOF allowed the conversion of credit cooperatives, trust investment companies, and small & medium business banks into commercial banks; hence the soaring increase in numbers of commercial banks. In the process, the nation saw an excessive number of similar bank products, thus diminishing the margin between bank profits. The stiff price competition resulted to the development of "too many banks with not enough business to handle"; as a result non-performing accounts began to pile up. A long period of faction disputes, internal trading, excessive overdue loans eroded the asset structure of a number of banks. The high level of non-performing assets made them seek mergers and acquisitions deals for reorganization into commercial banks or assimilation into other banks1.

Last November, the government passed the Bank Mergers Act in an aggressive effort to promote bank mergers. Aside from promulgating tax incentives and extension of the legal validity deadlines, the new law also relaxed regulations on mergers between banks and non banking corporations2, as well as granted the Ministry of Finance the right to force the receivership and merger of debt-laden farmer or fishery association credit departments. Moreover, it provided the legal foundation for placing overextended credit establishments under the "asset management company" setup.

The paper conducted an empirical study on Taiwan commercial banks through literature review and the two-stage method3 in the hope of providing local bankers and government authorities a reference for bank mergers evaluation. …