Efficiency Analysis of Chinese Banks

This thesis investigates the efficiency scores of Chinese banks by employing stochastic frontier analysis (SFA) and data envelopment analysis (DEA). Mean-while the study tries to examine which situation the results produced by one of both frontier models are more reliable. I estimate the cost efficiency based on a panel data set of 22 selected Chinese commercial banks over the period from 2009 until 2014. The result suggests that SFA and DEA yield a consistent trend on efficiency scores over the period, indicating the cost efficiency of Chinese banks did not show a significant improvement during the time period. However, rank correlations indicate both approaches produce contrary results at individual since both approaches are completely different. This thesis examines the two main differences between DEA and SFA which lie on measurement errors and heterogeneity for efficiency term which DEA can not account for. Further-more, based on the fact that both frontier approaches cannot provide a coherent overview of the performance of banks, I conclude that other instruments such as traditional performance measures should be used in order to evaluate the accuracy of frontier approaches.