Efficiency Measurement on a Process Level Using Data Envelopment Analysis: An Application to Securities Settlement and Clearing

Abstract

The recent years have been extremely difficult for banks. Competition has increased and, in addition, last year the global financial market crisis hit the industry, from which many banks did not recover yet. As a consequence, financial institutions are looking for ways to cut costs and to increase their efficiency in production. This paper proposes a new methodological approach – based on Data Envelopment Analysis (DEA) – for the detection and analysis of inefficiency within a certain business process. As a case study, a typical banking process is analyzed: settlement and clearing of securities. The analysis is performed by utilizing a very large dataset of actual operational transaction data from one of the largest banks in Europe. In order to receive a comprehensive understanding of the process performance, three different perspectives on process efficiency are applied, whereas each is analysed by a distinct DEA approach. The results document not only the existence of inefficiency but also a high variance of process performance. Furthermore, it is found that the pattern of inefficiency differs across different views of performance in settlement and clearing. This research indicates that substantial inefficiencies occur due to the process execution performance. The analysis provides deep insights that can be helpful for understanding and improving the securities settlement and clearing process.

Keywords: banking, Data Envelopment Analysis (DEA), efficiency measurement, operations management, settlement and clearing

JEL Classification: C14, C44, G21, C67, D24, M11