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Liquidity Risk and Technical Efficiency in Macao’s Banking Industry

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Overview of the Study

This report presents a comprehensive analysis of liquidity risk and technical efficiency in Macao’s banking industry. The study aims to provide insights into the dynamics of liquidity ratios, technical efficiency scores, and their relationships with bank size, income diversification, and profitability.

Liquidity Risk

  • The liquidity ratio of Macao’s banking industry has fluctuated over the years, with some periods showing higher ratios than others.
  • In 2012-2019, the average liquidity ratio was around 80%.

Technical Efficiency (TE)

Estimation of TE Scores

  • TE is estimated using Data Envelopment Analysis (DEA) under an intermediation approach.
  • The mean of TE scores from 2012 to 2019 was around 94.9%, indicating a relatively high level of efficiency.

Breakdown of TE Scores

  • Pure Technical Efficiency (PE): PE scores were higher than TE scores, indicating that banks in Macao could improve their Scale Efficiency (SE).
    • The mean of PE scores was around 98.0% over the sample period.
  • Scale Efficiency (SE): SE scores indicate that banks in Macao operate at a scale that is not optimal.
    • The average SE score was around 96.8%, suggesting some room for improvement.

Relationship between Bank Size, Income Diversification, and Profitability

  • Bank size has shown steady positive growth from 2012 to 2019.

Income Diversification and Profitability

  • Income diversification and profitability have fluctuated during the same period.

Empirical Results

Multivariate Regression Framework

  • A multivariate regression framework was employed to investigate the association between bank liquidity risk and efficiency.
  • The results showed that liquidity risk is associated with bank efficiency, but the relationship is complex and influenced by various factors.