A survey on bank branch efficiency and performance research with data envelopment analysis

The banking industry has been the object of DEA analyses by a significant number of researchers and probably is the most heavily studied of all business sectors. Various DEA models have been applied in performance assessing problems, and the banks' complex production processes have further motivated the extension and improvement of DEA techniques. This paper surveys 80 published DEA applications in 24 countries/areas that specifically focus on bank branches. Key issues related to the design of DEA models in these studies are discussed. Much advice is included on how to design future experiments and studies in this domain. A number of areas where further research could be fruitful are suggested.     

Sound branch cash management for less: A low-cost forecasting algorithm under uncertain demand

This paper deals with cash management for bank branches, under the assumption that branches have a role to play in the improvement of global bank institution performance. In the current scenario of unprecedented pressure amongst banks to keep costs under control, our contribution is the design of a sound and low-cost algorithm to optimize branch cash holdings using software implementation in SageMath. It is accompanied by data processing based on 60,000 real banking records. This is the first academic paper to run such an extensive database at branch level.We find that our algorithm by and large performs well when forecasting the cash amounts that the branch might require from the central hub to satisfy all branch necessities, avoiding the generation of either surplus or shortage of cash. It is also extremely easy to implement in daily branching practice, leading to an overall reduction in operating costs. In addition, our algorithm may be easily adjusted as required and be tailor-made to the special requirements of each banking institution.     

Two-stage evaluation of bank branch efficiency using data envelopment analysis

There are two key motivations for this paper: (1) the need to respond to the often observed rejections of efficiency studies’ results by management as they claim that a single-perspective evaluation cannot fully reflect the operating units’ multi-function nature; and (2) a detailed bank branch performance assessment that is acceptable to both line managers and senior executives is still needed. In this context, a two-stage Data Envelopment Analysis approach is developed for simultaneously benchmarking the performance of operating units along different dimensions (for line managers) and a modified Slacks-Based Measure model is applied for the first time to aggregate the obtained efficiency scores from stage one and generate a composite performance index for each unit. This approach is illustrated by using the data from a major Canadian bank with 816 branches operating across the nation. Three important branch performance dimensions are evaluated: Production, Profitability, and Intermediation. This approach improves the reality of the performance assessment method and enables branch managers to clearly identify the strengths and weaknesses in their operations. Branch scale efficiency and the impacts of geographic location and market size on branch performance are also investigated. This multi-dimensional performance evaluation approach may improve management acceptance of the practical applications of DEA in real businesses.     

Evaluation of bank branch growth potential using data envelopment analysis

Banks occasionally employ frontier efficiency analyses to objectively identify best practices within their organizations. Amongst such methods, Data Envelopment Analysis (DEA) was found to be one of the leading approaches. DEA has been successfully applied in many bank branch performance evaluations using traditional intermediation, profitability and production approaches. However, there has been little focus on assessing the growth potential of individual branches.This research presents five models that examine three perspectives of branch growth. Each model was applied to the branch network of one of Canada׳s top five banks to gauge the growth potential of individual branches and to provide tailored improvement recommendations. Using various analysis methodologies, the results of each model were examined and their functionality assessed.     

Sales performance measurement in bank branches

Studies of bank branch performance have, to date, concentrated on obtaining a single perspective of efficiency. As the financial services industry has intensified, banks have increasingly engated in a proactive, differentiated and customer-based strategy in retail banking in which the sales component of the bank branch activity is emphasized. With the emerging sales culture within banks, as discussed earlier, there is a need to evaluate both sales and service performance. Cook et al. [12] have proposed a model to evaluate simultaneously the sales, service, and aggregate efficiencies of a bank branch. This model accounted for the fact that inputs, in particular resources, are often shared among these functions. In this paper, we extend the data envelopment analysis additive model using goal programming concepts. We thereby derive optimal efficiency scores while taking into account non-volume related activities, that is those involving resources that cannot be assigned to a specific input or output. Again, the proposed model derives an optimal split of the shared resources that maximizes the aggregate efficiency.     

Performance measurement and classification data in DEA: Input-oriented model

This paper presents an improved efficiency measurement tool by modifying the existing data envelopment analysis methodology to permit the incorporation of expert knowledge. A previous paper examined the inclusion of such knowledge within the additive model. This information appeared in the form of a binary classification of a subset of the decision making units under study (e.g. good versus poor performers). In the current paper, we extend this logic to the input-oriented radial projection model. We demonstrate that the inclusion of this and other forms of expert judgment can improve the performance of the DEA tool in the sense that the efficiency scores are more in line with expert/management beliefs.     

Do performance and environmental conditions act as barriers for cross-border banking in Europe?

This paper attempts to analyse whether banking technology and environmental conditions act as barriers for the entry of foreign banks in each European banking industry. We evaluate how the efficiency score of a representative commercial bank of a given European country changes if it decides to move abroad. To carry out this analysis, we use a sample of 700 banks belonging to 11 European countries. Countries are paired and each couple is studied by using four DEA production frontiers. These frontiers allow us to measure the technological and environmental gaps between the two countries considered and, based on them, to predict the new efficiency score of the representative bank of a country that decides to operate in a different country. The results indicate, as expected, that being technologically advanced appears to be a significant deterrent to foreign competition, and that adverse environmental conditions constitute a real barrier for cross-border banking activity. Additionally, the results suggest that host-nation banking performance is a good safeguard against cross-border competition.     

商业银行分理处效率对效益的影响程度分析

在运用数据包络分析方法对商业银行分理处进行效益和效率的评价的基础上,提出分析效率对盈利性影响程度的方法,通过对某商业银行支行的12个分理处的实证分析,初步证明了该方法的有效性。     

Integration and efficiency convergence in EU banking markets

Evidence of financial integration and convergence are considered of importance in assessing the outcome of EU deregulation policies aimed at improving the efficiency and performance of banking sectors. This paper evaluates the recent dynamics of bank cost efficiency by means of data envelopment analysis (DEA). Borrowing from the growth literature, we apply dynamic panel data models (GMM) to the concepts of β-convergence and σ-convergence to assess the speed at which banking markets are integrating. We also employ a partial adjustment model to evaluate convergence towards best practice. Results seem to provide supporting evidence of convergence of efficiency levels towards an EU average. Nevertheless, there is no evidence of an overall improvement of efficiency levels towards best practice.     

Serial Chain Merger Evaluation Model and Application to Mortgage Banking*

Mortgage banking operations can be viewed from a supply chain perspective, where the primary and secondary markets are upstream and downstream chain members, respectively. This article describes a serial‐chain‐merger data envelopment analysis (DEA) model to assess potential gains from the merger of different chain operations. We show that in our framework the merger of different chains with many sub‐chains is efficient within the DEA paradigm if and only if the mergers of sub‐chain members are all efficient. A case study of a banking operations merger is conducted to illustrate and validate the proposed approach. The computations show that merger of operations can result in overall efficiency improvement in the banking industry if the merger preserves the features assumed in the DEA model.     

Association of DEA super-efficiency estimates with financial ratios: Investigating the case for Chinese banks

The great majority of applications of the popular frontier technique data envelopment analysis (DEA) do not test for the association of efficiency estimates with key performance indicators used by industry observers. Nevertheless, identifying efficiency estimates’ associations with commonly accepted financial measures of performance could guide benchmarking activities, pricing decisions, and regulatory monitoring. Thus, the current paper investigates to what extent bank DEA super-efficiency estimates are associated with key financial ratios. A low correlation may present an opportunity to address inefficiencies that were not obvious in financial ratio analysis, thus enabling an update of inferences drawn from ratios. Regressing ratios on efficiency estimates may also help predict financial ratios. Where an input–output specification is comprised of key financial ratios, DEA can also be used to objectively identify benchmarks for ratio analysis based on actual observed data collected from peers. Nine super-efficiency DEA formulations across two profitability models are systematically tested. The slacks-based measure of DEA with a parsimonious profitability efficiency model emerges as the most significant combination explaining the variation in the two industry ratios, post-tax profit/average total assets and return on average equity.     

A Measure of Throughput Orientation: Scale Development and Nomological Validation

Throughput orientation, although a well‐established concept in operations management and well recognized by practitioners, has received limited empirical attention potentially due to lack of a psychometrically validated scale. Based on the tenets of throughput orientation—mindset, methodology, and measurement—we propose and develop a psychometrically validated 26‐item scale of throughput orientation (TO). To lower the possibility of nonfalsifiability between TO and performance, we draw on an unexplored context—bank branches in India—where we expect this relationship to be weaker. Furthermore, as throughput in operations is mainly dependent on market demand, market orientation (MO) is proposed as a nomological moderator strengthening the TO‐performance relationship. Using a sample of 173 branch managers of a major private bank in India, we validate the throughput orientation scale, and find that MO strengthens the relationship between TO and performance.     

金融监管对商业银行产品创新影响——基于两阶段DEA模型的研究

以金融监管为视角,从银监会政策发布到各商业银行设计理财产品产生收益,其政策效应过程是有衔接分阶段性的。本文运用两阶段的数据包络分析(Data Envelopment Analysis, DEA)方法,将监管环境下银行理财产品的运营过程分为创新产品设计与创新产品市场表现两个阶段,得到了2004年至2014年间我国银行业的创新效率,结果显示第一阶段的银行业产品创新效率和第二阶段的理财产品市场表现效率基本上呈现出正相关的关系,且金融监管对商业银行产品创新的影响效果有一定的滞后性。此外,通过计算出历年银行业创新效率投入指标的改进值,找出了效率非有效的年份与最佳效率的年份在投入产出上的差距,并从监管者的角度和银行操作层面为针对银行产品创新的监管改进提供了政策建议。     

MEASUREMENT OF MULTIPLE SITES IN SERVICE FIRMS WITH DATA ENVELOPMENT ANALYSIS

Data envelopment analysis (dea) has become an increasingly popular method to measure performance for service firms with multiple sites. DEA is superior to many traditional methods for firms that have multiple goals. The promise of DEA is that the complex, multi-objective problem of performance measurement can be reduced to a single number. Unfortunately, the practice of DEA often belies the promise. Misconceptions concerning the purpose and implementation of DEA can cause DEA applications to be less than successful. Here, the technique is explained, and a guide to the implementation of DEA is proposed, utilizing DEA studies of retail bank branches.     

Using data envelopment analysis for the assessment of technical efficiency of units with different specialisations: An application to agriculture

In this paper we consider the use of data envelopment analysis (DEA) for the assessment of efficiency of units whose output profiles exhibit specialisation. An example of this is found in agriculture where a large number of different crops may be produced in a particular region, but only a few farms actually produce each particular crop. Because of the large number of outputs, the use of conventional DEA models in such applications results in a poor efficiency discrimination. We overcome this problem by specifying production trade-offs between different outputs, relying on the methodology of Podinovski (J Oper Res Soc 2004;55:1311–22). The main idea of our approach is to relate various outputs to the production of the main output. We illustrate this methodology by an application of DEA involving agricultural farms in different regions of Turkey. An integral part of this application is the elicitation of expert judgements in order to formulate the required production trade-offs. Their use in DEA models results in a significant improvement of the efficiency discrimination. The proposed methodology should also be of interest to other applications of DEA where units may exhibit specialization, such as applications involving hospitals or bank branches.     

A generalisation of the Farrell cost efficiency measure applicable to non-fully competitive settings

This paper enhances cost efficiency measurement methods to account for situations where the input prices can depend on negotiation or tend to qualitatively differentiate the resources available at each decision making unit. In these circumstances, there are some shortcomings in the cost efficiency measure described in the data envelopment analysis (DEA) literature. This paper proposes new models and measures for cost efficiency evaluation that overcome the limitations of the existing DEA models. The applicability of the measures developed is illustrated in the context of the analysis of bank branch performance.     

评价相对效率的投入—产出型DEA

传统 DEA只能在固定投入或产出的条件下 ,从产出或投入角度测算决策单元相对效率 ,因而不能综合地反映决策单元的投入产出效果 .基于双目标规划 ,本文将提出从投入及产出角度评价决策单元相对效率的投入—产出型 DEA,并研究其相对有效性 .最后以沪市 1 6家高科技上市公司为应用实例 ,研究其相对经营效率     

评价相对效率的投入-产出型DEA

传统DEA只能在固定投入或产出的条件下,从产出或投入角度测算决策单元相对效率,因而不能综合地反映决策单元的投入产出效果.基于双目标规划,本文将提出从投入及产出角度评价决策单元相对效率的投入-产出型DEA,并研究其相对有效性.最后以沪市16家高科技上市公司为应用实例,研究其相对经营效率.     

Data envelopment analysis: Prior to choosing a model

In this paper, we address several issues related to the use of data envelopment analysis (DEA). These issues include model orientation, input and output selection/definition, the use of mixed and raw data, and the number of inputs and outputs to use versus the number of decision making units (DMUs). We believe that within the DEA community, researchers, practitioners, and reviewers may have concerns and, in many cases, incorrect views about these issues. Some of the concerns stem from what is perceived as being the purpose of the DEA exercise. While the DEA frontier can rightly be viewed as a production frontier, it must be remembered that ultimately DEA is a method for performance evaluation and benchmarking against best-practice. DEA can be viewed as a tool for multiple-criteria evaluation problems where DMUs are alternatives and each DMU is represented by its performance in multiple criteria which are coined/classified as DEA inputs and outputs. The purpose of this paper is to offer some clarification and direction on these matters.     

Is corporate governance different for the Lebanese banking system?

This paper investigates the effect of board size and its composition on bank’s performance in an emerging context. This study includes 749 firm years of data on the banking industry in Lebanon from 1992 to 2006. The data contains all nationwide banks in operation in any year over the studied period. Since some banks entered and/or exited over the sample period, there is an unbalanced panel data, where an Ordinary Least Squares regression may create problems of interpretation. Within this framework, we use a fixed-effect model which produces unbiased and consistent estimates of the coefficients. This paper reports that bank performance is positively related to board size. It also identifies a quadratic relationship between bank performance and board independence. Both return-on-assets and return-on-equity first decrease and then increase in direct proportion to the increased percentage of outside directors on the board. This paper sheds some light on the differential impact of corporate governance on firm performance across industries and countries. It concentrates on banks in developing countries that are generally known to suffer from high asymmetric information and where concerns about safety and soundness remain. Hence, it contributes to the existing debate on appropriate regulations for an effective and stable financial system in the Arab world. Also, it complements the Basel Committee standards for bank supervision and capital adequacy reinforcement, and offers regulators some evidence on the relationship between board size and bank performance in a developing country such as Lebanon.