Competition, Liberalization and Efficiency: Evidence from a Two-Stage Banking Model on Banks in Hong Kong and Singapore

Hong Kong and Singapore are economically similar and rival international financial centers. Banks in both Hong Kong and Singapore operate in very similar environments: internationally oriented with protected domestic banking market and firm regulators. With liberalization under the Financial Services Accord of the World Trade Organization (WTO), comes more competition and the growing importance for banks to ensure that they are X-efficient so as to compete successfully or risk being marginalized. This paper uses data envelopment analysis (DEA) to assess X-efficiency of banks in Hong Kong and Singapore via a two-stage (combining both the intermediation and production stages) banking model. Changes in X-efficiency over time are computed to determine if policy initiatives have facilitated improvements in efficiency. Our results on X-efficiency of banks demarcated by size and ownership provide valuable insights into the issues of scale economies and the impact of family ownership on X-efficiency.