(4) According to the official report by China Banking Regulatory Commission (CBRC) in 2012, the total number of CCBs is 142, and their total assets are 12346.9 billion (only about 9. Many CCBs are keen to compete with SOCBs and JSCBs for large customers and big projects (Wang et al, 2012 Wang, 2000). Many CCBs are not clear about the market position. (3) They face the strong competition with 4 big SOCBs and 12 joint-stock commercial banks.

(2) In recent years, banking regulators reformed the financial system by paying more attention to the reform of state-owned commercial banks and rural credit cooperatives, but they ignored the CCBs. As a result, the development of CCBs is in the state of imbalance in the eastern and western parts of China. Due to the вЂњsingle cityвЂќ management model, CCBs are greatly affected by the local economic development level and the credit environment. However, CCBs face at least three problems in Chinese financial service market: (1) Majority of CCBs rely heavily on their cityвЂ™s economies, and only provide services for SMEs in their cities. In recent years, CCBs have grown intensely and outperformed in making significant gains of market share while achieving high returns (Ferri, 2009). Therefore, CCBs are always called as the third echelon as compared to 4 SOCBs and 12 joint-stock commercial banks. CCBs have an advantage of knowing more information on SMEsвЂ™ business operations and lend to them much as their long-term relationship with SMEs. Due to asymmetric information between banks and enterprises, 4 state-owned commercial banks (SOCBs) and 12 joint-stock commercial banks (JSCBs) tend to support state-owned enterprises (SOEs) and large enterprises, while ignoring smallвЂ“medium-sized enterprises (SMEs). Providing financial services for smallвЂ“medium-sized enterprises (SMEs), Chinese City Commercial Banks (CCBs) play an important role in the regional economic development in China. (3) As an interesting result we found that the scale effect works against the merger, indicating that it is not favorable for a full-scale merger. (2) It is also shown that the main impact on potential merger gains are from technical and harmony efficiency. We concluded that (1) there exist considerably potential gains for the proposed merged banks. To show the usefulness of the proposed approach, we applied it to a real dataset of top 20 most competitive Chinese City Commercial Banks (CCBs). We show that the model can be extended to a two-stage structure and these efficiencies can be decomposed to both sub-systems. Moreover, the overall merger efficiency could be decomposed into technical efficiency, harmony efficiency, and scale efficiency. The model minimizes the total cost of the hypothetical DMU while maintaining its outputs at the current level, and estimates the overall merger efficiency by comparing its minimal total cost with its actual cost.

In order to solve the problem, a Merger Production Possibility Set (PPS M) is constructed. The hypothetical DMU would surpass the traditional Production Possibility Set (PPS). In this model, a hypothetical DMU is defined as a combination of two or more candidate DMUs. This paper develops a novel two-stage cost efficiency model to estimate and decompose the potential gains from Mergers and Acquisitions (M&As).

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