Evaluating the Operational Efficiency of the Banking Sector in Taiwan: A Two-Stage Data Envelopment Analysis Approach

Abstract

In this study we adopted two-stage data envelopment analysis (DEA) methods, including the Charnes–Cooper–Rhodes and Banker–Charnes–Cooper methods, to evaluate the performance of marketing-orientation and profit-orientation activities on the cost efficiency of Taiwan's banks. The conventional DEA model was modified to take into account the series relationship for dividing two sub-processes in order to identify the causes of inefficiency. Information was obtained from 37 Taiwanese banks for the period from 2008 to 2011. The Malmquist total factor productivity index was employed to measure the effect of productivity changes on the panel data. The empirical results from the two-stage approach indicate the following: (1) the mean efficiency score of profitability stage banks is higher than that of the marketability stage banks; (2) the technical efficiency is significantly different from ranking according to the operating scale and pure technical efficiency, and the scale efficiencies are significantly different from ranking according to fixed assets; and (3) economies of scale and scope exist at small and medium-sized banks.