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Total factor productivity of Thai banks in 2007-2010 an application of DEA and malmquist index

This paper shows that the global crisis had a late effect on Thai banks as the TFP only dropped in 2010. While the local banks maintained their stable, foreign banks were more fluctuating – some improved their TFPs, some did not and become worst performers in the system. | Journal of Applied Finance & Banking, vol.2, no.5, 2012, 27-42 ISSN: 1792-6580 (print version), 1792-6599 (online) Scienpress Ltd, 2012 Total Factor Productivity of Thai Banks in 2007-2010 An Application of DEA and Malmquist Index Dang-Thanh Ngo1 and Linh Thi Phuong Nguyen2 Abstract This research employs the Data Envelopment Analysis (DEA) and Malmquist index approaches to evaluate the efficiency and Total Factor Productivity (TFP) changes of Thai banking system in the period of 2007-2010 using panel data of 27 major banks in Thailand. This paper shows that the global crisis had a late effect on Thai banks as the TFP only dropped in 2010. While the local banks maintained their stable, foreign banks were more fluctuating – some improved their TFPs, some did not and become worst performers in the system. The reason behind it may relate to the fact that Thai banking system is currently running at decreasing returns to scale situation, which proposes that Thai banks are wasting resources in over-expansion. Hence, continuing to develop and restructuring the banking system is an emergence task for Thailand in the near future. JEL classification numbers: E50, G21, G28 Keywords: Thai banking system, efficiency, data envelopment analysis, Malmquist index, Global financial crisis 1 University of Economics and Business (Vietnam National University, Vietnam), email: ndthanhf@yahoo.com 2 Asia-Pacific International University (Thailand), email: phuonglinhmc@gmail.com Article Info: Received : June 3, 2012. Revised : June 23, 2012 Published online : October 15, 2012 28 Total Factor Productivity of Thai Banks in 2007-2010 1 Introduction Over the past years, Thai banks have been competed intensely in many aspects. Thailand banking industry has witnessed many ups and downs in different periods and continues to grow and becomes one of the most vital sectors in Thailand. In 2010, according to the Bank of Thailand (BOT), Thai banking industry achieved net profit 123 billion .