How Does Competition Affect Bank Efficiency Across the China-Taiwan Strait?

Most studies of competition in the banking industry use only a single measurement method to evaluate levels of bank competition. This study integrates structural and non-structural models to investigate the competitive conditions, contestability, efficiency, and market structure of banks across the China-Taiwan strait from 2006 to 2019. The results of both the structural and non-structural approaches indicate that the banking industry across the China-Taiwan Strait is not perfectly competitive, a result that supports the relative market power hypothesis rather than the efficient structure hypothesis. Insights from the deregulation analysis using difference-in-differences and triple difference models show that financial institutions from smaller economies face significant challenges when entering the banking sectors of larger economies. These challenges include substantial entry costs and barriers, which impede short-term profitability. The findings of the threshold models indicate that banks achieve substantial earnings despite inefficiencies, which is attributable to the limited number of real competitive rivals. This suggests that while market power may not enhance bank efficiency, it significantly influences profitability.