Economic Modelling 33 (2013) 433439

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Economic Modelling
journal homepage: www.elsevier.com/locate/ecmod

A comparison of operating performance management between Taiwan

banks and foreign banks based on the Meta-Hybrid DEA model
Yung-ho Chiu a,, Zhengying Luo b, Yu-Chuan Chen c, Zebin Wang d, Min-Pei Tsai e
a

Department of Economics, Soochow University, No. 56, Sec. 1, Kuei-yang Street, Taipei 100, Taiwan, ROC
Finance Management, Dongwu Business School, Soochow University in China, No. 50, Donghuan Rd., Suzhou, Jiangsu Province, People's Republic of China
Department of Finance, Chihlee Institute of Technology, Taiwan, ROC
d
Dongwu Business School, Soochow Univeristy in China, NO. 50 Donghuan Rd., Suzhou, Jiangsu Province, P.R. China
e
Department of Economics, Soochow University, Taiwan, ROC
b
c

a r t i c l e

i n f o

Article history:
Accepted 16 April 2013
Keywords:
Operating efciency
Hybrid DEA model
Meta-Frontier model

a b s t r a c t
This study uses a sample of 48 commercial banks in Taiwan for the period 2008 to 2010 to compare the operating efciency between 30 domestic banks and 18 foreign banks. Due to differences in cultural sentiments,
values, and business philosophies, this paper employs the Meta-Hybrid DEA model to construct the group
frontier and to calculate technology gap ratios (TGR) as inter-group objective indicators, which are then applied to compare the performance across the two groups of banks.
The empirical results show that: 1) the risk factor the proportion of the total amount of overdue loans to
total loans affects the value of rms' technical efciency. 2) From the standard deviation of the
three-year average TGR between domestic and foreign banks, domestic banks reach 0.19802, which is
much higher than foreign banks' 0.00388. This represents that there are great differences in average group
efciency and the technology gap ratio between foreign banks and domestic banks. 3) The operating performance of foreign banks is signicantly better than domestic banks.
2013 Elsevier B.V. All rights reserved.

1. Introduction
Along with the trend of global nancial liberalization and internationalization, Taiwan has relieved controls on agencies, canceled restrictions on business, allowed for the establishment of private banks, and
reduced the limitation of foreign banks' operations in Taiwan. In the
1990s, the Taiwan government approved the establishment of new
banks, securities, and trust and investment companies and also encouraged foreign banks to invest in Taiwan in order to help the domestic nancial market get rid of the situation caused by monopolization before
1990. With the global nancial trends helping Taiwan's nancial market
liberalization and innovation, the local banking environment has become increasingly competitive. As such, bank performance issues are
coming to the forefront, prompting the need to explore the performances of these new domestic banks and foreign banks with operations
in the country. At the same time, we know that a higher level of competition not only can improve a bank's efciency, but also pushes banks towards higher risk. Thus, that risk is an important factor to measure
banking efciency.

Corresponding author. Fax: +886 2 27976015.

E-mail addresses: echiu@scu.edu.tw (Y. Chiu), lzywxl@suda.edu.cn (Z. Luo),
ycchen@mail.chihlee.edu.tw (Y.-C. Chen), szwzb@163.com (Z. Wang),
animo0527@gmail.com (M.-P. Tsai).
0264-9993/$ see front matter 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.econmod.2013.04.039

Risk's impact on business performance within the bank industry has

become a focal point. In discussing bank efciency and risk, most DEA
studies, such as Chang (1999), Pastor (1999), Drake and Hall (2003),
Chiu et al. (2008, 2011), and Chiu and Chen (2009), utilized radial linear
programming DEA model to estimate the bank efciency. However,
overdue loans are banks' risk variables, quite volatile, and cannot produce the same proportional change as with other variables. In reality,
the operations of a bank industry do not adhere to the assumptions of
the radial DEA methodology, in which a risk variable is adjusted proportionally with other input factors (e.g. labor and xed assets) when measuring efciency. Therefore, this study will use the hybrid DEA model
proposed from Tone (2004), in which the inputs are not all assumed to
change proportionally, to evaluate the operational efciency of Taiwan's
bank efciency.
Most discussions on bank business performance in the past literature separate the investigation into national banks or foreign banks,
with the assumption that the assessment units (decision making unit,
DMU) have the same production technology standard. Cooper et al.
(2000) illustrated briey that one DMU employs one kind of technology, while the other DMU adopts another, and one should not reasonably
assume there is any technology set in-between them. More recently, researchers, such as Bos and Schmiedel (2003), and Huang et al. (2010)
have used the application of the meta-frontier (O'Donnell et al., 2008)
to evaluate a bank's operational efciency, in which the technology
gap indicator presents the difference between operating types.

434

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

The traditional Meta-Frontier model is based on the BBC model, as

it also assumes full proportionality change between input factors.
However, overdue loans are banks' risk variables cannot produce
the same proportional change as with other variables. Therefore,
this study uses the Hybrid Meta-Frontier DEA model, taking into account the proportional and non-proportional changes in variables'
characteristics, to evaluate the operational efciency of banks in
Taiwan.
The research framework is as follows: Section 1 is introduction,
Section 2 is literature review, Section 3 is the empirical model, Section
4 is the empirical analysis of results, and Section 5 is nal conclusions
and recommendations.

Linear Programming Method on common production boundary to discuss the technology level of the Indonesia textile industry. O'Donnell et
al. (2008) accessed the Meta-Frontier model to compare the technology
level of agriculture production in 97 countries in Africa, North America,
Asia, and Europe. From the above studies, we see that that MetaFrontier is widely applied to compare the efciency analysis of different
countries, different systems, or different types of textile, agriculture, and
shery industries. The Meta-Frontier can also be applied on bank efciency analysis, as in Bos and Schmiedel (2003), and Huang et al. (2010) who
applied the common cost function to discuss banking performance.

2. Literature review

In a review of Data Envelopment Analysis (DEA) Farrell (1957) assumed that technology is the bowed inward point of constant returns
to scale (CRS) and the production boundary. He suggested to use the
proportion of single outputs and single inputs as the measurement
of a given technology and the actual inputoutput combination as a
possible optimum combination of gap indicators to estimate the optimum efciency production boundary. Charnes et al. (1978) (CCR) extended the concept and added Shephare's distance function concept
(1970) to estimate the efciency of each decision-making unit
(DMU). However, in the production process, variable returns to scale
seem to be the normal practice and cannot be taken into consideration
as constant returns to scale.
Banker et al. (1984) then added a convex constraint of linear combination (output expansion or reduced inputs sum up to 1) and proposed the BCC model whereby constant returns to scale are replaced
by variable returns to scale. Tone (2001) proposed the non-radial and
non-oriented method through slacks for the rst time. This enables
one to nd the optimal efciency when inputs or outputs cannot be
solved by adjusting the proportion. It is called the difference between
the variable base models (SBM model). Based on the introduction of
the previous models, there are two ways to measure companies' performance: non-radial efciency and radial efciency.
The difference between the two methods above is that radial efciency assumes that the number of inputs or outputs can achieve full production efciency according to the adjustment of proportion, but there is
also a drawback that ignores the existence of slacks, such as the CCR
and BCC models. Non-radial efciency directly processes the variables
of difference and adjusts inputs and outputs according to different proportion. However the weakness of non-radial efciency is that it neglects
the radial character of inputs and outputs, representing the SBM model.
In order to solve the above problems, Tone (2004) proposed the
Hybrid-DEA model. This model considers both radial variables and
non-radial variables and puts forward an improvement in each variable, by introducing another measurement mode without losing the
variable characteristics in the study of future performance. For measurement accuracy of different countries, systems, or types of comparison, O'Donnell et al. (2008) used the Meta-Frontier model for
analysis. Based on the different cultures, customs, values, and business philosophies between domestic banks and foreign banks, this
study applies Meta-Hybrid DEA to analyze the characteristics of radial
variables and non-radial variables.

Bank efciency has received signicant attention in the existing literature. Data Envelopment Analysis (DEA) is the most popular method
used to estimate banks efciency, such as Lin et al. (2007), Guzmn and
Reverte (2008), Liang and Yao (2008), Westhuizen (2010), Luo and Yao
(2010), Hsiao et al. (2010), and Paradi et al. (2010) who took traditional
DEA to assess bank performances. Aigner et al. (1977) submitted the
random boundary (Stochastic Frontier) concepts, constructed the parameter types of border functions, examined efciency estimation
using regression analysis, and applied stochastic boundary analysis
(SFA) to explore the inuence of random factors on bank management
efciency. Chen and Yeh (2000), Figueira et al. (2009) and Chiu and
Chen (2009) implemented DEA and SFA to look at the economic efciency of a DMU and to examine the inefcient factors and the impact
analysis results in order to compare the two methods for how to enhance positive credibility.
In view of the recent nancial crises around the world and uctuations in the unstable economic environment, the risk impact on industry performance has become a subject of global concern. In 2004 the
Basel committee on banking supervision (BCBS) announced the new
Basel (BASEL) capital accord and the implementation of BASEL Three
in October 2010. Chang and Chiu (2006) used the Basel capital agreement, capital adequacy ratio, credit risk, market risk, operational risk,
and risk management as their main research direction to discuss bank
performances.
The overdue loans ratio and the capital adequacy ratio are the more
common risks when studying banking variables. Mester (1996), Chang
(1999), Hughes (1999), Pastor (1999), Hughes et al. (2000), Altunbas et
al. (2000), Hughes et al. (2001), Drake and Hall (2003), Girardone et al.
(2004), Chang and Chiu (2006), Chiu et al. (2008, 2011), and Chiu and
Chen (2009) incorporated endogenous risk into the analysis of production and measured banks' efciency. They showed that if risk factors are
taken into account, then the risk factors have the biggest inuence on
efciency estimates and ranking. They also presented that increasing
risk (problem loans) tends to decease efciency.
Scholar also accessed diverse methods, in order to measure accuracy, for different countries, systems or types. Chen and Yeh (2000),
Figueira et al. (2009), and Niels and Nhung (2010) applied the traditional method DEA (Data Envelopment Analysis) to compare different
countries, different systems, or different types of banking efciency
analysis by commonly evaluating the efcient frontier. However, the
traditional DEA may incur an error, because it uses an evaluation unit
that may produce differences at the technological level when estimating the common efcient frontier.
Hayami (1969) and Hayami and Ruttan (1970) are the rst to use the
idea of the Meta-Frontier to measure agriculture productivity. Sharma
and Leung (2000) and Gunaratne and Leung (2001) successively applied
Stochastic Frontiers (SF) to x the original functional forms of the deterministic boundary, aiming at a multinational productivity analysis of
South Asian countries' carp industry and Asia black tiger shrimp industry.
Rao et al. (2003) then applied the common production frontier to evaluate multinational agricultural productivity. Battese et al. (2004) used the

3. Research method and empirical model

3.1. Hybrid DEA structure

Tone (2004) proposed the Hybrid DEA, which combines radial and
non-radial measurements. For the observation of the inputs and outputs,
mn
sn
and Y R+
, where the meanings of n, m, s are rethere are X R+
spectively manufacturers, inputs, and outputs. For the dismantlement of
m1
n
m2
n
is for the radial part, X NR R
is for the
the inputs matrix, X R R
non-radial part, and m = m1 + m2:
X

XR
X NR


:

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

s1
n
At the same time, in the dismantlement of outputs, Y R R
is for
s2
n
is for the non-radial part, and S = S1 + S2:
the radial part, Y NR R

Y
Y NR


:

P fx; yjx X; y Y ; 0g:

We nd in R n that is a non-negative vector (can also put up some
constraints, for example, j = 1, which indicates the variable
returns to scale model). It is DMU

xRo X R sR
NR
NR
xNR
o X s
yRo Y R sR
NR
NR
yNR
o Y s
1, 1, 0, s R 0, s NR 0, s R+ 0, s NR + 0, in which
sR Rm1 and sNR Rm2 respectively mean the excess of radial and
non-radial inputs, and sR Rs1 and sNR Rs2 respectively mean the insufciency of radial and non-radial outputs (which is regarded as slacks).
When = 1, = 1, o = 1, j = 0( j o) the difference is 0.
We dene the efciency index as:
1 mm1 1 m1

m2 NR
X
s

i
xNR
io
i1
s2 NR
X
s
r
1
s
NR
r1 yro

Hybrid min

3  3

Radial output inefficiency :

Non  radial output inefficiency :


s1  
1
s
2

1
NR
NR
=yr0 :
sr
s

The inefciency of inputs is = 1 + 2, and the inefciency of

outputs is = 1 + 2. Therefore, the efciency values can be:
1
1 1 2
:

1 1 1 2

This expression is conducive to nding the source of inefciency

and the impact scale on efciency values .

2
m1
1X
sNR
i
1
m
m i1 xNR
io
2
s1
1X
sNR
r
1
s
s r1 yNR
ro

R
 R
xo xo
NR
NR
NR
xo xo s
 R
R
yo yo
NR
NR
NR
:
yo yo s

     NR SNR NR SNR

;  ;  ;s
 ;s
 :
t
t
t
t
t

In addition, Eq. (3-3) is the DMU of hybrid inefciency ( b 1), which


becomes a projected point of the efcient boundary xRNRRNR
:
o ;xo ;yo ;yo

It is = 1 for DMU (xo,yo) = (xoR,xoNR,yoR,yoNR) P to present hybrid

efciency, which also means = 1, = 1, sNR = 0, sNR + = 0. The
optimal result could be (, ,,sNR ,sNR + ).

xRo X R
NR
NR
xNR
o X s
R
R
yo Y
NR
NR
yNR
o Y s
1; 1; 0; sNR 0; sNR 0:

s:t

We now present the analysis of inefciency dismantlement as follows. The optimal solution is ( , ,s NR ,s NR + ), in which , the
hybrid efciency indicator, can be dismantled into four factors:
m1 

Radial input inefficiency : 1
1
m
m2
1X
NR
NR
s
=xi0
Non  radial input inefficiency : 2
m i1 i


R NR R NR
xo ; yo xo ; xo ; yo ; yo P

s1
s

The optimal result of the above formula is (t , , , ,s NR ,

s NR + ), and the optimal hybrid efciency solution is:
; ;

This assumes that the sum of data values is positive, which is X > 0,
Y > 0. As a result, production is likely combined with P and dened as:

435

3  1

3.2. Hybrid technology gap measurement

Battese and Rao (2002) and Battese et al. (2004) specied the
non-stochastic frontier estimation, based on the meta-frontier concept, to calculate the technology gap. O'Donnell et al. (2008) calculated the technology gap through the radial DEA model. Our study
further develops the hybrid technology gap measurement, based on
the hybrid DEA model, to analyze the difference between different regions' operational technologies.
Suppose that the overall DMU can be classied into I groups,
which employ different operating technologies. The sample size of
the ith group is J i and satises iI = 1J i = J. We re-write Eq. (3-2) as:


Min :;;;sNR ;sNR

i

Through the transformation method of Charnes and Cooper (1962),

Eq. (3-1) turns into linear programming, as shown in Eq. (3-2):
LP
s:t

2
m
1X
sNR
i
mint 1 t
m
m i1 xNR
io
s2 NR
s1
1X
sr
t t
1
s
s r1 yNR
ro

R
R
xo X
NR
NR
NR
txo X S
R
R
yo Y
NR
NR
NR
tyo Y S
NR

t; t; 0; S

J
I X
X
R
R
xjin ji xen ;

s:t:

n 1; ; N

i1 j1
i

J
I X
X
NR
xjim ji sNR
xNR
m
em ;
i

J
I X
X
R
R
yjip ji yep ;

p 1; ; P

i1 j1
i

3  2

J
I X
X
NR
NR
NR
yjiq ji sq yeq ;

q 1; ; Q

i1 j1
i

J
I X
X
ji 1;

0; SNR 0:

m 1; ; M

i1 j1

i 1; ; I

i1 j1
NR
1; ji 0; sNR
m 0; sq 0:

3  4

436

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

The optimal objective value of is identied as meta-efciency, following the denition of O'Donnell et al. (2008). We compute the efciency score of DMUe (labeled i) evaluated based on the ith group
(namely, group-efciency) by solving this mathematical program:

1
i

Min :;;;sNR ;sNR

 1
N

i
iNR NR
s
=xem
1
R
R m1 m
M
X

Q
 1 X
s1
i
iNR
NR
1 sq =yeq
s
s q1

s:t:

J
X
R
i R
xjn j xen ;

n 1; ; N

j1
i

J
X

NR

xjm j siNR
xNR
m
em ;

m 1; M

j1

3  5

J
X

yjp j yep ;

p 1; ; P

j1
i

J
X

NR

iNR

yjq j sq

NR

yeq ;

q 1; ; Q

j1
i

J
X
j 1;
j1
i

iNR

1; j 0; sm

iNR

0; sq 0:

In order to distinguish the difference between technologies, we

dene the technology gap ratio (TGR) of efciency for ith group's
jth DMU (i.e., DMUij) as:


i

TGRij = :

3  6

The growth index of the TGR can be explained by the relative technological progress or regress of the country (or a rm) in group I with
respect to shifts in the meta-technology or to different regional technology changes. If the gap between the group frontier and the Meta
Frontier is decreasing, then the growth index of the TGR is less than 1.
4. Empirical analysis
4.1. Sample selections
This study is based on Taiwan commercial banks' data analysis,
made up of 30 domestic banks and 18 foreign banks in Taiwan from
2008 to 2010. The data sources are mainly taken from the Taiwan Economic Journal (TEJ) and the nancial statements provided by FSC Banking Bureau for comparisons and discussions of operating performances
between Taiwan domestic commercial banks and foreign banks operating in Taiwan.

total deposits, number of bank employees, and xed assets to be radial

inputs. Table 1 are listed the inputs and outputs variables.
4.3. Empirical results of the mixed DEA (Hybrid DEA) model
This study applies the Spearman's correlation coefcient test to conrm whether a linear correlation existed within the radial and nonradial outputs. In Table 2, the correlation coefcients of Loan and Investment, Loan and Other income, and Investment and Other income are
higher than 0.760 in domestic banks. The correlation coefcients of
Non-performing loans and Loan, Investment, and Other income, are
lower than 0.350 in domestic banks. In Table 3, the correlation coefcients of Loan and Investment, Loan and Other income, and Investment
and Other income are higher than 0.280 in foreign banks. The correlation coefcients of Non-performing loans and Loan, Investment, and
Other income, are lower than 0.120 in foreign banks. The results indicate that there exists a higher degree of linear correlation (i.e., proportionate relationship) within the three radial outputs and exists a
lower degree of linear correlation (i.e., non-proportionate relationship)
between radial outputs and non-radial output. Therefore, the radial inputs and non-radial input of the dataset evaluated by using the hybrid
DEA model are reasonable.
On the basis of the research study's demands and the natural differences in the sample banks, we apply the DEA-SOLVER-PRO-6.0 versions of software to select the mixed outputs-oriented DEA model
(Hybrid model) for efciency value assessment and estimation
(which is the analysis of the operating performances of 30 domestic
banks and 18 foreign banks). Our analysis of the inefciencies of domestic banks and foreign banks is as follows.
4.4. Empirical analysis of domestic banks by the Hybrid model
As we see from Table 4, in 2008 nine domestic banks operate inefciently. For example, the output invalid rate of Taishin International
Bank is 0.045, which is completely radial inefcient. For Jih Sun International Commercial Bank, and Standard Chartered Bank, their inefciency rates are respectively 5949.013 and 0.213, which are both
caused by non-radial outputs and 100% inuenced by overdue loans.
Table 5 reveals the operating inefciency of 10 domestic banks in
2009, which mainly are Sunny Commercial Commercial Bank at
0.390, Union Bank at 0.568, Volkswagen Commercial Bank at 0.025,
and Jih Sun International Commercial Bank at 0.282. Their inefciencies are completely caused by the adverse impact of non-performing
loans. However, the inefcient of E.Sun Commercial Bank and Bank

Table 1
Denitions of input and output variables.
Source: TEJ and personal selection.
Variable

4.2. Variables' selection and denitions

Based on the nancial intermediary role and previous studies, such
as Humphrey (1991), Siems (1992), Yue (1992), Hughes and Mester
(1993), and Kaparakis et al. (1994), there are four outputs to be evaluated, in which three general outputs total loans (including business
loans and individual loans), total investment (such as marketable securities issued by the government, public enterprises, and/or private
enterprises), and non-interest income (includes fees, commission revenue, and other non-operating income) are dened as radial outputs.
Considering the property of non-proportionality change in the NPL
ratio, we dene the NPL ratio as a non-radial output. There are three
types of input: the number of bank employees, xed assets, and deposits, Bank deposits are dened as the sum of checking accounts, savings deposits, and time deposits. We assume input indicators including

Inputs
Total deposit (X1)

Employee (X2)
Fixed assets (X3)

Denition

Unit

Sum of the check deposits, demand deposits, time

deposits, negotiable certicates of deposits, post
ofce deposits, savings deposits, and other deposits
remittances
Number of employees in the bank
Fixed assets composed of land, property,
equipment, etc.

NT$
million

Outputs
Loan (Y1)

Total loans

Investment (Y2)

Short-term investments and long-term investment

Other income (Y3) Interest income, fee income, and commission

income
Non-performing
Non-performing loans/Total loans
loans ratio (Y4)

Person
NT$
million

NT$
million
NT$
million
NT$
million
%

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

437

Table 2
Domestic banks of Spearman's correlation coefcient test.

l Deposit
Employee
Fixed assets
Loan
Investment
Other income
Non-performing loans

Deposit

Employee

Fixed assets

Loan

Investment

Other income

Non-performing loans

1
0.8629
0.9122
0.9836
0.8513
0.9152
0.2611

1
0.7813
0.8554
0.7523
0.9597
0.3228

1
0.8461
0.8821
0.8275
0.1540

1
0.7641
0.9057
0.2409

1
0.8159
0.3387

1
0.3509

Table 3
Foreign banks of Spearman's correlation coefcient test.

l Deposit
Employee
Fixed assets
Loan
Investment
Other income
Non-performing loans

Deposit

Employee

Fixed assets

Loan

Investment

Other income

Non-performing loans

1
0.8629
0.5531
0.7571
0.2526
0.8884
0.1073

1
0.7112
0.6877
0.3920
0.9527
0.1221

1
0.5797
0.3268
0.5665
0.3230

1
0.2886
0.7716
0.0377

1
0.4935
0.1180

1
0.0414

SinoPac are the radial variable inefciency, respectively 0.055 and

0.053.
In 2010 eleven domestic banks operated inefciently. The inefciency of Jih Sun International Commercial Bank is 0.347, of which
0.001% is from radial variables (up to 0.024) and 99.999% is from
non-radial variables (up to 0.347). The non-radial outputs' inefciency rate of Medium Business Bank of Taiwan, Taichung Commercial
Bank, and Yangxin Sunny Bank is 100% caused by non-radial overdue loans, respectively at 0.278, 0.018, and 0.314 (Table 6).

4.5. Hybrid model's empirical analysis of foreign banks

Table 7 shows the reason why six foreign banks in Taiwan have
negative performances in 2008. From Banque Indosuez's inefcient
of 0.106, more than half (59.65%) of this proportion is the invalid
rate of 0.064 from the impact of non-radial NPLs. For Bangkok Bank,
Metropolitan Bank, and Societe Generale, the reason why their outputs are inefcient is due to radial variables rather than the NPL
ratio. Their inefciencies of outputs are respectively 0.326, 0.001
and 0.225.
Apart from the ve poor performances of the foreign banks in
Table 8 in 2009, only Standard Bank of Fiji has inefcient outputs,
which are the result of non-performing loans of 0.812. At the same
time, the inefciency values of Societe General, Deutsche Bank, and

Bank of East Asia are respectively 0.440, 0.037, and 0.137, but they
still have nothing to do with non-performing loans.
Table 9 presents the inefcient foreign banks in 2010. The radial variable outputs' inefciency of Bangkok Bank ING Bank, Deutsche Bank
and Bank of East Asia are respectively 0.290, 0.426, 0.236 and 0.691.
The above results show that, for domestic banks, the negative operating performance is caused by overdue loans, led by Standard
Chartered Bank and Jih Sun International Commercial Bank in 2008,
Sunny Commercial Bank, Union Bank, Ta Chong Bank, and Jih Sun International Commercial Bank in 2009, and Jih Sun International Commercial Bank, Taiwan Business Bank, Taichung Commercial Bank, and
Sunny Commercial Bank in 2010. For foreign banks, apart from the
non-radial outputs' inefciency of Banque Indosuez in 2008 and the
Standard Bank of Fiji in 2009 accounting for more than 50% of inefciency, their negative performance is seriously impacted by risk and
overdue loans. Radial variables, not overdue loans, made up the factor
for the following banks' inefcient performance: Bangkok Bank, Bank
of the Philippine Capital, and Societe Generale in 2008; Societe
Generale, Deutsche Bank, and Bank of East Asia in 2009; and ING
Bank, Deutsche Bank, etc. in 2010.

4.6. Empirical result of the Meta-Frontier

According to Table 10, the relative indicator TGR, which is treated
as group efciency, has as comparable value to the groups' boundary
with the Meta-Frontier gap ratio. In 2008, the mean TGR value of the

Table 4
Source of the inefciency rate of domestic banks in 2008.
Bank

Inefciency Radial

Hua Nan Commercial

0.075
Bank
Chang Hwa Commercial
0.107
Bank
Medium Business Bank of
0.197
Taiwan
Sunny Commercial Bank
0.261
Taishin International
0.045
Bank
Jih Sun International
5949.014
Commercial Bank
Shin Kong Commercial
0.142
Bank
Capital of Commercial
0.094
Banks
Standard Chartered Bank
0.213

(Rate, %) Non-radial (Rate, %)

0.014

(18.76%)

0.061

(81.24%)

0.050

(46.59%)

0.057

(53.41%)

0.070

(35.34%)

0.127

(64.66%)

0.115
0.045

(44.04%)
(100%)

0.146
0

(55.96%)
(0%)

(0%)

0.121

(84.98%)

0.021

(15.02%)

0.041

(43.01%)

0.054

(56.99%)

0.213

(100%)

0.0002 (0%)

5949.014

(100%)

Table 5
Resources of the inefciency of domestic banks in 2009.
Bank

Inefciency

Radial

(Rate, %)

Non-radial

(Rate, %)

Hua Nan Commercial

Bank
Chang Hwa Commercial
Bank
Taichung Bank
Sunny Commercial Bank
Union Bank of Taiwan
E.Sun Commercial Bank
Ta Chong Bank
Jih Sun International
Commercial Bank
Shin Kong Commercial
Bank
Bank SinoPac

0.186

0.039

(20.74%)

0.147

(79.26%)

0.072

0.021

(29.67%)

0.050

(70.33%)

0.080
0.390
0.568
0.055
0.024
0.282

0.012
0
0
0.055
0
0

(15.45%)
(0%)
(0%)
(100%)
(0%)
(0%)

0.068
0.390
0.568
0
0.024
0.282

(84.55%)
(100%)
(100%)
(0%)
(100%)
(100%)

0.153

0.054

(35.18%)

0.099

(64.82%)

0.053

0.053

(100%)

(0%)

438

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

Table 6
Sources of domestic banks' inefciency in 2010.

Table 8
Resources of inefciency for foreign banks in 2009.

Bank

Inefciency Radial

(Rate, %) Non-radial (Rate, %)

Bank

Inefciency

Radial

(Rate, %)

Non-radial

(Rate, %)

Hua Nan Commercial

Bank
Chang Hwa Commercial
Bank
Medium Business Bank
of Taiwan
Taichung Bank
Sunny Commercial
Bank
Union Bank of Taiwan
Far Eastern
International Bank
Jih Sun International
Commercial Bank
Shin Kong Commercial
Bank
Bank SinoPac

0.137

0.027

(19.96%) 0.110

(80.04%)

0.053

0.014

(26.03%) 0.039

(73.97%)

0.278

(0%)

0.278

(100%)

Bangkok Bank
Societe Generale
Deutsche Bank
Bank of East Asia
Standard Bank of Fiji

0.269
0.440
0.037
0.137
0.820

0.265
0.440
0.037
0.137
0

(98.47%)
(100%)
(100%)
(100%)
(0%)

0.004
0
0
0
0.820

(1.53%)
(0%)
(0%)
(0%)
(100%)

0.018
0.314

0
0

(0%)
(0%)

0.018
0.314

(100%)
(100%)

0.121
0.036

0.091
0.013

(75.24%) 0.030
(36.10%) 0.023

(24.76%)
(63.90%)

0.347

0.024

(0.001%) 0.347

(99.999%)

0.074

0.023

(31.48%) 0.051

(68.52%)

0.022

0.0007 (3.41%)

0.0215

Table 9
Inefciency of foreign banks in 2010.
Bank

Inefciency

Radial

(Rate, %)

Non-radial

(Rate, %)

Bangkok Bank
Deutsche Bank
Bank of East Asia
ING Bank

0.358
0.236
0.692
0.426

0.290
0.236
0.691
0.426

(80.87%)
(100%)
(99.81%)
(100%)

0.069
0
0.001
0

(19.13%)
(0%)
(0.19%)
(0%)

(96.59%)

5. Conclusion
domestic banks' is relatively smaller than foreign banks. Thus, the
level of production technology of the domestic banks' group is weaker than the Meta-Frontier of the technical standards, the operating
performances of foreign banks are relatively good, and the operating
performances of domestic banks are bad.
Table 11 shows that the mean TGR value of the domestic banks' in
2009 is relatively smaller than foreign banks (only half of the foreign
banks). Thus, the calculated value of the mean TGR value of foreign
banks is much greater, and the level of production technology of foreign banks is closer to the technical level on the Meta-Frontier and
shows better performance.
Table 12 presents that the situation in 2010 is similar to 2009. The
mean of Meta-Frontier efciency is smaller than foreign banks. Foreign banks have a larger mean TGR, better performance, and a closer
level of production technology to the Meta-Frontier. However, the
mean TGR between domestic banks and foreign banks is comparatively smaller in 2009.
From Table 13, we nd that the average group border efciency of
domestic banks is slightly larger than that for foreign banks. Moreover, the average efciency value of the Meta-Frontier is smaller compared to the value for foreign banks. Foreign rms' mean TGR of 0.999
is closer to 1 than the domestic banks' 0.726, showing overall performance of foreign banks is better.
In order to enhance the persuasiveness of the empirical results, after
a detailed empirical data analysis and discussion, we take a further statistical test (Wilcoxon Test) to see whether there is evidence of signicant operating performance differences between domestic banks and
foreign banks. Table 14 summarizes the test results shows that under
the 1% signicance level, the two types of banks reject the null hypothesis indicating that the two types of banks have different technology gap
ratio in 2008, 2009, and 2010. This result represents a signicant level of
99%, presenting evidence that the operating performances of domestic
banks differ from foreign banks. The latter outperform the former.

Our research divides forty-eight banks in Taiwan, both domestic and

foreign, into two groups and takes data from 2008 to 2010 for analysis.
This research uses the Hybrid Meta-Frontier model to evaluate local
banks' and foreign banks' production efciency. We now present the
following results.
1. By comparing Radial and non-Radial inefciencies to analyze the
impact of risk factors on business performance, we nd that the
non-Radial variable is the dominating reason that causes banks'
inefciency.
2. For the foreign banks, Deutsche Bank, Bank of East Asia, Societe
Generale, and Bangkok Bank show relatively poor operating performance. Their poor performances mostly belong to non-Radial
outputs' inefciency. Therefore, in comparison to foreign banks,
the operating performances of domestic banks are more signicantly inuenced by the risk factors.
3. Even though overdue loans present an inconsistent inuence on
domestic banks and foreign banks, it is still possible that such overdue loan reduce bank efciency. Thus, it is necessary to analyze the
NPL ratio as a variable.
4. The study nds that the performances of foreign banks are better
than domestic banks. After further verication through tests, regardless of 2008, 2009 and 2010, and the three-year average performance,
foreign banks have a signicant difference in their performances,
which are signicantly better than domestic banks' performances.
Based on the empirical results, it nd that the risk variable is the
dominating the banks' inefciency when measuring a bank's efciency in Taiwan's banking industry. So, a domestic and foreign bank
Table 10
Meta-Frontier efciency value and TGR of domestic banks and foreign banks in 2008.
Group

Group boundary
efciency value

Meta-Frontier
efciency value

TGR

Domestic banks
Foreign banks

0.934
0.938

0.778
0.935

0.828
0.997

Table 7
Resources of inefciency for foreign banks in 2008.
Bank

Inefciency

Radial

(Rate, %)

Non-radial

(Rate, %)

Bangkok Bank
Metropolitan Bank &
Trust
Societe Generale
Deutsche Bank
Bank of East Asia
Banque Indosuez

0.326
0.001

0.326
0.001

(100%)
(100%)

0
0

(0%)
(0%)

0.225
0.185
0.775
0.106

0.225
0.182
0.769
0.043

(100%)
(98.31%)
(99.25%)
(40.35%)

0
0.003
0.006
0.064

(0%)
(1.69%)
(0.75%)
(59.65%)

Table 11
Meta-Frontier efciency value and TGR of domestic banks and foreign banks in 2009.
Group

Group boundary
efciency value

Meta-Frontier
efciency value

TGR

Domestic banks
Foreign banks

0.953
0.914

0.459
0.913

0.469
0.999

Y. Chiu et al. / Economic Modelling 33 (2013) 433439

Table 12
Meta-Frontier efciency value and TGR of domestic banks and foreign banks in 2010.
Groups

Group boundary
efciency value

Meta-Frontier
efciency value

TGR

Domestic banks
Foreign banks

0.936
0.935

0.829
0.935

0.881
0.9996

Table 13
Meta-Frontier values of domestic banks and foreign banks and the technical gap ratio
from 2008 to 2010.
Category

Group boundary
efciency values

Meta-Frontier
efciency values

TGR

Local banks
Foreign banks

0.941
0.929

0.689
0.928

0.726
0.999

Table 14
Wilcoxon test results of the two groups of TGR value.
Year

Domestic banks'
TGR mean

Foreign banks'
TGR mean

Wilcoxon
test value

2008
2009
2010
Mean

0.828
0.469
0.881
0.726

0.997
0.999
0.9996
0.999

0.0025
0.0008
0.0005
0.0001

On the two-tailed test, signicant at 0.10.

On the two-tailed test, signicant at 0.05.
On the two-tailed test, signicant at 0.01.

should carry out a careful investigation on borrowers' credits, and nancial conditions before providing a loan to borrowers. At the same
time, this study also nds the domestic banks tend to adopt a loose
loan strategy while facing market competition and this strategy generates higher risk of default loan. Under this strategy, the domestic
banks may provide various nancing services and nancing products
with specic characters to avoid higher risk.
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