Determinants of Banking Efficiency and Survival in Taiwan with Consideration of the Real Management Cost

ABSTRACTBy using a real management cost method to re-calculate economic costs at Taiwanese banks, this article sheds light on the relationship between CAMELS (capital, asset quality, management, earnings, liquidity, and sensitivity) theory and bank survival by analyzing the impact of key CAMELS indices on cost efficiency, which in turn influences bank survival. We estimate cost efficiency at banks using stochastic frontier analysis (SFA) and economic provisions for loan loss based on Shen and Chen (2010). The seven key determinants are the capital adequacy ratio, the non-performing loan ratio, the deposit growth rate, the return on assets, the leverage ratio, the scale of assets, and whether a bank is owned by a financial holding company. These CAMELS indices significantly affect cost efficiency at surviving banks and failed banks and have different effects. The measure of provisions for loan losses significantly affects cost efficiency at banks and makes the outcomes closer to reality. We also outline so...