Journal of Finance and Bank Management

A Study of the Relationship between Bank Survival and Cost Efficiency
Lien-Wen Liang, Cheng-Ping Cheng, Yi-Pin Lin

Abstract
This study aims to investigate the relationship between a bank’s survival and its cost efficiency by examining47 commercial banks in Taiwan between the years 2000 and 2008. Based on the CAMELS model, wefirst use logistic regression to extract the key factors which might affect bank survival. Then, according to Battese and Coelli (1995), we simultaneously estimate the stochastic cost frontier function and the inefficiency functionto evaluate the bank’s cost efficiency. Our main empirical findings are as follows: (1) Four key factors that cause bank survival or failure are debt ratio, non-performing loans (NPLs) ratio, growth rate of assets and bank’s ownership. (2) The higher the debt ratio and the NPL ratio, the worse is the efficiency of banks. (3) The cost efficiency of state owned banks are better than that of private banks. (4) The averagecost efficiency of failed banks is worse than that of survived banks.

Full Text: PDF     DOI: 10.15640/jfbm.v3n2a4