The Use of DEA to Assess the Financial Efficiency of Large Banks
Global Business and Finance Review, Vol. 1, No. 1, pp. 1-12, Spring 1996
15 Pages Posted: 22 Apr 2015 Last revised: 18 Aug 2015
Date Written: May 15, 2015
Abstract
Data Envelopment Analysis (DEA) was used to analyze the input/output efficiency of large U.S. banks in 1987 and 1992. The former was the year that banks belatedly began to acknowledge financially the increasingly severe problems from loans to less-developed countries, especially in Latin America. In 1987 it was found that the DEA-efficient ("best practices") banks were in fact financial "bad practice" banks. It appears something akin to a herd instinct led banks to make excessive loans to LDC, especially in Latin America. These foreign loans became so pervasive that DEA identified them as a positive, necessary focus in bank efficiency. As a result, DEA "inefficient banks" were identified as deficient in foreign loan outputs. However, their foreign activities were actually more profitable (less unprofitable) than DEA identified "efficient banks." Further, "inefficient banks" were more profitable than "efficient banks" in all measures, overall, foreign and domestic. . By 1992, the LDC loan crisis had passed and DEA identified "best practice" banks were also financial "good practice" banks. Banks appeared to be more rational and normal than in 1987. DEA-identified "efficient banks" were then more profitable in all measures (overall, foreign, and domestic) than "inefficient banks" And, "inefficient banks" were identified as deficient in foreign loan outputs, but in this case their foreign activities were profitable.
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