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An enhanced DEA model for decomposition of technical efficiency in banking

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Abstract

Past studies about the application of data envelopment analysis (DEA) to banking performance often follow the concept of technical efficiency (TE) and/or the productivity defined by the TE. In this paper, we propose an enhanced DEA model, based on a modification of the directional distance function by simultaneously but disproportionately seeking the maximum expansion of each desirable output and contraction of each undesirable output for efficiency measurement, which allows us to decompose the TE into operating efficiency (OPE) and risk management efficiency (RME). The OPE characterizes the ability of a bank to expand the room for profits through its regular business activities, while the RME describes a bank’s ability in risk management activities for sustaining operations. To illustrate the usefulness of the proposed model, a case study of Taiwan’s domestic commercial banks is presented. The major findings are that operating inefficiency is the main source of technical inefficiency, although banks with a higher OPE generally also have a higher RME. Banks subordinate to financial holding companies are more efficient in both OPE and RME than stand-alone banks.

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Authors and Affiliations

  1. Department of Marketing Management, Central Taiwan University of Science and Technology, No. 666, Pu-tzu Road, Taichung, 406, Taiwan

    Chih-Ching Yang

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  1. Chih-Ching Yang
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Correspondence to Chih-Ching Yang.

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The author would like to thank two anonymous referees for their helpful comments and suggestions on an earlier version. All remaining errors are the author’s responsibility.

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Yang, CC. An enhanced DEA model for decomposition of technical efficiency in banking. Ann Oper Res 214, 167–185 (2014). https://doi.org/10.1007/s10479-011-0926-z

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