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Estimation of bank performance from multiple perspectives: an alternative solution to the deposit dilemma

Abstract

In this paper, we propose a flexible two-stage data envelopment analysis (DEA) approach to evaluate the bank performance. Specifically, instead of fixing the role of the deposits in an ex-ante manner, the proposed approach regards deposits as a flexible measure in which it can play different roles for different banks under evaluation. Further, the traditional two-stage approach that regards deposits as an intermediate measure can be a special case of our proposed approach. Additionally, a potential Pareto efficiency improvement for multiple perspectives is identified, which can mitigate discontentment arisen from those fixed-role strategies. The applicability and superiority of the proposed approach is illustrated by assessing the performance of Chinese listed banks over the period from 2014 to 2018. The empirical results demonstrate consistent evidence that the inefficiency of the banking system in China is mainly sourced from the value-added stage. However, different banks may prefer to clarify different roles for the deposits, demonstrating the importance of employing the proposed flexible approach.

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Notes

  1. 1.

    The People’s Republic of China was established in 1949, and the reform and opening-up policy was introduced until 1978.

  2. 2.

    In practice, the role played by the binary variable b can be summarized as follows: On the one hand, variable b can be the classifier to identify whether the flexible measure should be regarded as an input or an output. Specifically, compared with traditional fixed-role strategies, the use of binary variable to indicate the role of the deposits can mitigate organizational resistance especially when there is no consensus on the role of those flexible measures. Meanwhile, from manager’s perspective, the use of binary variable to indicate the role of the deposits has various managerial implications. To explore it, recall that once the evaluation mechanism is determined, then banks would like to efficiently allocate resources so as to guarantee a higher efficiency score. In this circumstance, the use of binary variable to indicate the role of the deposits can be very useful and important, because it directly influences the decisions on how to project those inefficient banks onto the efficient frontier. Nevertheless, when a fixed role strategy is employed, one may fail to allocate resources efficiently, i.e., the projection scheme in traditional fixed role strategies cannot guarantee an efficient point on the frontier derived from our proposed flexible two-stage DEA model.

  3. 3.

    We here thank the reviewer for indicating this kind of issue.

  4. 4.

    See http://finance.people.com.cn/bank/n/2014/0110/c202331-24077517.html (accessed July 30, 2020).

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Acknowledgements

The authors would like to thank the editor, the anonymous associated editor and two reviewers for their valuable comments and suggestions on the manuscript throughout the whole review process. This work is supported by the National Natural Science Foundation of China (No. 72071161, No. 71571150), and the Fundamental Research Funds for the Central Universities (No. 2232021E-10).

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Correspondence to Jiawei Yang.

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Li, D., Li, Y., Gong, Y. et al. Estimation of bank performance from multiple perspectives: an alternative solution to the deposit dilemma. J Prod Anal 56, 151–170 (2021). https://doi.org/10.1007/s11123-021-00614-z

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Keywords

  • Bank performance
  • Data envelopment analysis (DEA)
  • Deposit dilemma
  • Flexible measure
  • Two-stage model