The X-efficiency of commercial banks in Hong Kong

Using the stochastic frontier approach to investigate the cost efficiency of commercial banks in Hong Kong, this paper found that the average X-efficiency of Hong Kong banks was about 16–30% of observed total costs. However, X-efficiency was found to decline over time, indicating that Hong Kong banks were operating closer to the cost frontier than before, consistent with technological innovations in the banking industry. Furthermore, the average large bank was found to be less efficient than the average small bank, but the size effect appears to be related to differences in portfolio characteristics among different size banks.