Bank Branch Efficiency with DEA

Bank Branch Efficiency with DEA

Mehmet Hasan Eken (Istanbul Commerce University, Turkey) and Süleyman Kale (Ziraat Bankası, Turkey)
DOI: 10.4018/978-1-4666-4474-8.ch022


In this chapter, the extent of inefficiency of bank branches in different dimensions is evaluated with slack-based model of data envelopment analysis. Each efficiency dimension reveals the strengths, weaknesses, and improvement capabilities of branches. Multi-dimensional comparison enables the determination of the overall characteristics and the choice of the improvement strategies accordingly. An extensive literature analysis of bank branches and future research directions is also presented.
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Sherman and Zhu (2006b) list at least 14 techniques for service productivity management: Standard cost systems, comparative efficiency analysis, ratio analysis, profit and return on investment measures, zero-base budgeting, program budgeting, best practice analysis, peer review, management reviews, activity analysis, process analysis, staffing models, balanced scorecards and data envelopment analysis. Paradi and Zhu (2013) mention common performance measurement approaches applied to bank branches as ratio analysis, regression analysis, frontier efficiency analysis, and other artificial intelligence techniques (i.e. neural networks, analytic hierarchy processes and balanced scorecards). Here, we will focus on non-parametric frontier efficiency tool, data envelopment analysis (DEA), to measure efficiency of bank branches.

DEA is proved to be one of most important performance and decision analysis tools in management of bank branches. Not only it benchmarks the branches, provides potential improvement capabilities, indicates sources of inefficiency, it also helps to determine the overall situation in different dimensions.

One purpose of this study is to investigate the production and profitability dimensions of bank branches in order to reveal their performing characteristics. Multidimensional analysis enables us to develop a performance model for measuring the relative efficiency and improvement capabilities of bank branches by identifying their strengths and weaknesses in different aspects. Another purpose is to analyze bank branch efficiency studies and present an overall look and perspective. The study distinguishes from the others with an extensive list of researches.

The chapter proceeds as follows. In the next section data envelopment analysis, sources of inefficiency and approaches in determining inputs and outputs are explained. Then, efficiency studies with data envelopment analysis are described. In the following section, an empirical multidimensional bank branch efficiency analysis is conducted. Finally future research directions and conclusions are presented.

Key Terms in this Chapter

The Production Approach: An approach in specifying variables for the models that treats a bank or bank branch as a production unit using some resources as input to produce deposits, earning assets, non-earning assets and other products.

Transaction Approach: An approach mostly used in branch banking to evaluate the success of producing maximum number of transaction and/or account with minimum amount of resources.

Slack Based Model: A non-radial DEA model that, different than basic radial DEA models CCR and BCC, deals with both input excesses and output shortfalls simultaneously and measures efficiency between 0 and 1. SBM is not translation invariant and it identifies more sources of inefficiency.

Scope Efficiency: Success of a unit at operating with optimum product mix.

Pure Technical Efficiency: Efficiency evaluated by BCC model and it represents success of a unit at converting inputs to outputs.

Scale Efficiency: Success of a branch at operating in optimum scale. Scale efficient branch works at the most productive scale size.

Technical Efficiency: Efficiency evaluated by CCR model and it represents the overall success of a branch at converting inputs to outputs and operating at right returns to scale. Technical efficiency is composed of two components, pure technical efficiency and scale efficiency.

Intermediation Approach: An approach in banking that estimates the efficiency of banks in converting resources into assets.

The Profitability Approach: An approach in banking that assumes cost-related items (personnel expenses, non-interest expenses, loan loss provisions, etc.) as inputs and revenue-related items (net interest income, non-interest income, etc.) as outputs.

Cost Efficiency: Success of a unit at minimizing its costs considering input and/or output prices.

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