Impact of Bank Operational Efficiency Using a Three-Stage DEA Model

Abstract

In this study the authors use a three-stage sequential technique to develop a Data Envelopment Analysis (DEA) model for examining a bank's technical efficiency index. Internal risk and environmental risk are incorporated into this model to accommodate the well-known BASEL III Accord (required capital adequacy ratio in the financial industry) and to ensure the amount of derivatives turnover ratio is at the level defined by industry best-practices. Information is obtained from 34 Taiwanese commercial banks for the period from 2008 to 2011 following the global financial crisis. The Malmquist total factor productivity index (TFP) is also employed to measure the impact of changes in productivity on the panel data. Empirical results derived from the DEA approach show a gain in technical efficiency and scale efficiency in the industry after adjusting the slack variables when using the corrected ordinary least squares (COLS) regression model. The results indicate that commercial banks need to diversify to increase their market share when dealing with derivatives which are associated with higher risk. The Balk's Malmquisit TFP index shows a decrease in bank productivity and improvement in pure technical efficiency. In this study the authors found that after risk-adjustment there was a distinct inefficient unit decrease and but a marginal unit increase in efficiency.