Journal of Banking and Finance Management Volume 2, Issue 3, 2019, PP 24-38 ISSN 2642-9144 Journal of Banking and Finance Management V2 ● I3 ● 2019 24 Study of Hong Kong Banking System Hien Thu Phan 1 , Hanh Thi My Phan 2 , Kevin Daly 3* 1 School of Banking, University of Economics Ho Chi Min City, Vietnam 2 Faculty of Finance and Banking, University of Finance - Marketing, Vietnam 3 School of Business, University of Western Sydney, Australia *Corresponding Author: Kevin Daly, school of Business, University of Western Sydney, Australia, Email: k.daly@westernsydney.edu.au INTRODUCTION Traditionally Hong Kong has been acknowledged globally as having a strong, independent and stable banking system, in addition the Hong Kong dollar has over time been recognized as a stable managed currency, the Hong Kong economic model is viewed by foreigners as somewhat more liberal than that of mainland China, in addition Hong Kong administers a lower taxation regime relative to most developed economies, taken together these characteristics make Hong Kong an attractive financial investment destination for multinational banks (Zhang and Daly, 2012). The dramatic development of Hong Kong's financial sector has provided good conditions for operations of big banks in the world in recent years. In 2014, there were around 70 of the biggest 100 banks in the world, 202 authorised institutions and 61 representative offices operating in Hong Kong. The high concentration levels of international banking institutions may result in an increased competition in the banking sector. As a result, Hong Kong's financial services industry is ranked second and third in the list of countries that have a highly competitive financial services industry following the IMD’s World Competitiveness Yearbook and the Global Financial Centers Index, respectively. In the highly competitive environment, bank efficiency has raised concern to improve the performance, management quality and strength of banks. Efficiency analysis is also a way to move banks toward a best practice frontier (Berger et al., 2009). However, only limited studies have examined bank efficiency in Hong Kong. For instance, Kwan (2006) estimated X-efficiency using the Stochastic Frontier Analysis(SFA) approach whereas Drake et al. (2006) investigated technical efficiency using the two- stage Data Envelopment Analysis(DEA) approach. Both studies used data set of the Hong Kong banking sector before 2001. Hence, it seems to be lack of the latest empirical evidence on efficiency of the Hong Kong banking system, especially over the period of the global financial crisis. Therefore, this paper attempts to fill a demanding gap in the literature by investigating the cost efficiency of the Hong Kong banking sector during the period 2004 to 2014 capturing the effect of the global crisis on efficiency. Additionally, unlike prior studies on bank efficiency in Hong Kong, the study measured bank efficiency using both parametric ABSTRACT This paper investigates bank cost efficiency and analyses the relationships between competition, stability, and efficiency in the Hong Kong banking system over the period 2004 – 2014. The study employs various approaches to measure bank efficiency, bank competition and bank stability for the robustness checks of the results. Our findings suggest that bank competition is negatively related to cost efficiency whereas bank stability (measured by Z-score ROAA) has a positive impact on cost efficiency. By contrast, effects of bank stability (measured by Z-score ROAE) and credit risk on bank efficiency may be positive or negative when considering efficiency measured by different approaches. The bank size, listing status of banks, macroeconomic environments (including gross domestic product (GDP) growth, inflation, and global financial crisis) have positive effects on cost efficiency. On the contrary, revenue diversification and liquidity risk contribute to decreases in cost efficiency in this banking sector. Keywords: Bank efficiency; stability; competition; Stochastic frontier analysis; Data Envelopment Analysis JEL Codes: C2, G2