Abstract
In this paper, Data Envelopment Analysis (DEA) is developed to analyze the efficiencyof a single bank. The inputs are given in terms of cost of personnel, cost of material andexpected cost of credit losses. Outputs concern lending, deposits and gross revenues (interestmargins and non-interest income). The data covers 48 large Nordic banks during the twoyears 1992 and 1993. Fourteen banks are from Denmark, thirteen from Finland, twelve fromNorway and nine from Sweden. For each of these banks, the DEA method is used to form a“reference bank”, which is a convex combination of the best competing banks (those at theefficiency frontier). The three inputs and the three outputs of the reference bank will beused as benchmarks. This procedure implies that one can only say that one single bank isless efficient than its reference bank, not less efficient than another bank. The results showthat 4-7 Nordic banks were situated at the efficiency frontier for those two years. Thesebanks should then be used to form reference banks for other banks, and to set benchmarksfor them. Such benchmarks would have been slightly different, dependent on the “window”to be used, 1992, 1993 or 1992 + 1993.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
R1.D. Banker, A. Charnes and W.W. Cooper, Some models for estimating technical and scale inefficiencies in Data Envelopment Analysis, Management Science 30(1984) 1078–1092
S.A. Berg, F.R. Førsund, L. Hjalmarsson and S. Suominen, Banking efficiency in the Nordic countries, Journal of Banking and Finance 17(1993) 371 – 388.
A.N. Berger and D.B. Humphrey, The dominance of inefficiencies over scale and product mix economies in banking, Working Paper, Board of Governors of the Federal Reserve System, Washington, DC, USA, May 1990.
A.N. Berger and D.B. Humphrey, Efficiency of financial institutions: International survey and review, Draft Report, Department of Finance, Florida State University, Tallahassee, FL, November 1995.
C.E. Bogan and M.J. English, Benchmarking for Best Practice, McGraw-Hill, New York, 1994.
M. Brown and E.P.M. Gardener, A DEA approach towards evaluating bancassurance strategies: A preliminary note, European Association of University Teachers in Banking and Finance, Modena, Italy, Sept. 1994.
A. Charnes, W.W. Cooper, Z.N. Huang and D.B. Sun, Polyhedral cone-ratio DEA models with an illustrative application to large commercial banks, J. of Econometrics 46(Oct./Nov. 1990).
A. Charnes, W.W. Cooper and E. Rhodes, Measuring the efficiency of decision making units, European Journal of Operational Research 2(1978).
Den Norske Bankforening: Forretningsbankenes Årsregnskaper 1992 (Annual Reports for the Banks 1992), Oslo, 1993.
Den Norske Bankforening: Forretningsbankenes Årsregnskaper 1993 (Annual Reports for the Banks 1993), Oslo, 1994.
J. Doyle and R. Green, Data Envelopment Analysis and multiple criteria decision making, Omega, Int. J. of Mgmt Sci. 21(1993).
Finanstilsynet: Pengeinstitutter m.v., Statistisk materiale, 1992 (Financial Institutions, Statistics 1992), Copenhagen, Sept. 1993.
Finanstilsynet: Pengeinstitutter m.v., Statistisk materiale, 1993 (Financial Institutions, Statistics 1993), Copenhagen, Sept. 1994.
L. Gustafsson, Bäst i klassen. Benchmarking för högre effektivitet (Best in the class. Benchmarking for higher efficiency), Idéer, erfarenheter och råd från svenska och utländska företag, Sveriges-Verkstadsindustrier, Stockholm, 1992.
D.H. Humphrey, Productivity in banking and effects from deregulation, Economic Review, Federal Reserve Bank of Richmond, March/April 1991.
M. Oral and R. Yolalan, An empirical study on measuring operating efficiency and profitability of bank branches, European Journal of Operational Research 46(1990) 282 – 294.
H.D. Sherman and F. Gold, Bank branch operating efficiency, J. of Banking and Finance 9(1985) 297 – 315.
Statistiska Centralbyrån: Bankerna 1992 (Banks 1992), Official Statistics of Sweden, Örebro, Sept. 1993.
Statistiska Centralbyrån: Bankerna 1993 (Banks 1993), Official Statistics of Sweden, Örebro, Dec. 1994.
T.J. Stewart, A critical survey on the status of multiple criteria decision making theory and practice, Omega, Int. J. of Mgmt Sci. 20, no.5/6(1992).
Tilastokeskus (Statistikcentralen): Pankit, Bankerna, The Banks 1992, pankkikohtaisesti-enligt bank, Rahoitus 1993:27, Helsinki, 1993.
Tilastokeskus (Statistikcentralen): Pankit, Bankerna, The Banks 1993, Rahoitus 1995:5, Helsinki, 1995.
H. Tulkens, Non-parametric efficiency analyses in four service activities: Retail banking, municipalities, courts and urban transit, CORE Discussion Paper No. 9050, Université Catholique de Louvain, Louvain-la-Neuve, Belgium, 1990.
H. Tulkens, On FDH efficiency analysis: Some methodological issues and applications to retail banking, courts and urban transit, Journal of Productivity Analysis (1993).
H. Tulkens and Ph. Vanden Eeckaut, How to measure efficiency and productivity with special reference to banking, Draft Report, CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium, September 1995.
P. Yue, Data Envelopment Analysis and commercial bank performance: A primer with applications to Missouri banks, Federal Reserve Bank of St. Louis, Jan./Feb. 1992.
Rights and permissions
About this article
Cite this article
Bergendahl, G. DEA and benchmarks – an application to Nordic banks. Annals of Operations Research 82, 233–250 (1998). https://doi.org/10.1023/A:1018910719517
Issue Date:
DOI: https://doi.org/10.1023/A:1018910719517