Convergence of total factor productivity among banks: Hong Kong's experience

Are the less productive banks catching up to the more productive ones and, if so, how quickly and by what means? The objective of this study is to answer these questions by looking for convergence in total factor productivity (TFP) among banks in Hong Kong. Past research has identified two major factors governing productivity in the banking sector-scale economies and X-efficiency. If the gains from scale economies decline with firm size and the only difference between banks lies in their initial size, the initially smaller banks should eventually catch up to the initially larger ones because the former tends to grow more rapidly. However, the findings from this study do not support this hypothesis of “absolute convergence.” Indeed, the findings show strong evidence for “conditional convergence,” which means that the steady-state TFP to which a bank is converging is conditional on the bank's own level of X-efficiency. Conditional convergence implies that initial differences in X-efficiency among banks can, between them, create permanent differences in TFP.