Effects of financial reform on productivity change

The aim is to investigate the effects of the first financial restructuring (FFR) on productivity growth, technical progress and efficiency change, using data from 42 commercial banks in Taiwan from 2001 to 2004.

Data envelopment analysis is applied to compute the Malmquist index of productivity change.

It is found that Taiwan commercial banks on average experienced a 117.39 percent increase in productivity growth, of which is 2.11 percent is due to efficiency change and 115.28 percent to technical progress over the four year period. In addition, during the four year period, a 1 percent reduction in the nonperforming loan ratio resulted in 1.85 percent growth in productivity; a 1 percent increase in the capital adequacy ratio led to 2.15 percent growth in productivity.

It can be concluded that after the FFR, the productivity growth, technical progress, and efficiency change all improve, with the lower nonperforming loan ratio contributing to this improved performance.

The study provides evidence of the productivity change of the banking industry in Taiwan in response to the FFR. It also contributes additional empirical evidence on the impact of a reform on bank productivity in a developing country.