Review of Quantitative Finance and Accounting, 20: 385–413, 2003
2003 Kluwer Academic Publishers. Manufactured in The Netherlands.
Banking Mergers: The Impact of Financial
Liberalization on the Taiwanese Banking Industry
Department of Banking and Finance, National Chi Nan University, Taiwan
BAC VAN LUU
urttemberg, 4121 Bond Markets, Am Hauptbahnhof 2, 70191 Stuttgart, Germany
Abstract. The objective of this paper is to examine the nature of the Taiwanese banking sector and to analyze
the impact of ﬁnancial liberalization on the Taiwanese banking industry. We present empirical evidence to show
that the recent wave of bank mergers observed in other countries is also suitable for Taiwan. Based on empirical
results for overall economies of scale and expansion path subadditivity, Taiwanese banks should obtain the beneﬁt
of scale economies by merging with other banks rather than expanding by opening more branches. Furthermore,
we show that the Relative Market Power hypothesis—which postulates that greater market shares lead to higher
proﬁtability—ﬁnds empirical support in Taiwanese banking data after ﬁnancial reforms were enacted.
Key words: scale economies, scope economies, cost efﬁciency, merger
JEL Classiﬁcation: C33, G21, G14, L11
In the 1980s, technological advances in communication and information systems, progres-
sive elimination of ofﬁcial barriers to capital ﬂows, and intensiﬁcation of competition in an
increasingly deregulated environment were identiﬁed as three major forces to shape the new
landscape for global ﬁnancial markets. As a matter of fact, these forces have either directly
or indirectly accelerated the process of ﬁnancial liberalization in Taiwan.
many of the governments in Southeast Asia, Taiwan foresaw that after joining the World
Trade Organisation (WTO), the opening of the market and foreign competition could dec-
imate local banks unless it ﬁrst reformed its ﬁnancial markets internally. Thus, Taiwan’s
aggressive banking deregulation program was launched in the early 1990s. For instance, the
Taiwanese government allowed sixteen private commercial banks to be established since
1991 and domestic banks were granted permission to conduct stock brokering, trading, and
investment banking activities through subsidiaries.
In this paper, we examine whether the recent wave of bank mergers observed in other
countries is suitable for Taiwan by evaluating the competitve forces that impact on the
Taiwanese banking sector. These competitive issues are discussed from three different