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This paper assesses the relative technical efficiency of institutions operating in a market that has been significantly affected by environmental and market factors in recent years, the Hong Kong banking sector. These environmental factors are specifically incorporated into the efficiency analysis using the innovative slacks-based, second stage Tobit regression approach advocated by Fried et al (1999). A further innovation is that we also employ Tone’s (2001) slacks-based model (SBM) to conduct the Data Envelopment Analysis (DEA), in addition to the more traditional approach attributable to Banker, Charnes and Cooper (BCC) (1984).
The results indicate that both adjustments can have a significant impact on relative efficiency measures, ranks and trends, which is an important issue if such relative efficiency measures are to be used in policy analysis. The results also indicate: high levels of technical inefficiency for many institutions; considerable variations in efficiency levels and trends across size groups and financial sectors; and also differential impacts of environmental factors on different size groups and financial sectors.