Financial Determinants of Bank Performance in Taiwan

Abstract

As the consolidation of financial institutions is one of the highlights in recent financial territory, we examine whether banks being subordinated under the financial holding company (FHCs) outperform to independent banks in Taiwan, covering 15 FHCs banks and 18 independent banks in our sample for the period from 2005 to 2010. Using the CAMEL approach, we also investigate empirically further the financial determinants of banks’ performance regarding FHCs banks and independent banks respectively, and examine whether the financial determinants of banks’ performance differ before and after the financial crisis. Results show that ROA is strongly related to certain CAMEL ratios, such as the total capital ratio, loan loss reserve/gross loans, the burden ratio, and net interest income divided by total assets. Moreover, the positive significant capital adequacy ratio in the post-crisis period in our sample is mainly driven by subordinated banks. Finally, asset quality factor has explaining power for the pre-crisis and post-crisis periods, meaning prevention safety net built predominantly in refraining from external shocks.