Behind DEA efficiency in financial institutions

Abstract

DEA has been extensively used to measure the efficiency of financial institutions. Its advantages are clearly understood. But there are many unresolved problems. There are various views based on different modelling philosophies of what constitutes inputs and outputs in a financial institution. The paper explores up to what point the various combinations of inputs and outputs are equivalent, and up to what point the efficiency score obtained by a given institution changes under the various combinations of inputs and outputs. The extent to which two institutions that achieve the same efficiency score arrive at it following different strategies is explored with the aim of finding out what is behind such a score.

It is suggested that, not one but many different DEA specifications, containing different combinations of inputs and outputs, be modelled and that the results be analysed with the tools of multivariate statistics. Particular emphasis is placed on using tools that visualise the main characteristics of the data. By-products of the approach proposed here are the creation of league tables of financial institutions in terms of efficiencies and the possibility to assess strengths and weaknesses of individual institutions. This methodology is applied to the particular case of Spanish savings banks (Cajas de Ahorros) and proves to be particularly rewarding.

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