Abstract
The paper aims to improve the methodology of measuring efficiency of Latvian banks. Efficiency scores were calculated with application of non-parametric frontier technique Data Envelopment Analysis (DEA). Input-oriented DEA model under Variable Returns to Scale (VRS) assumption was used. Potential model variables were selected based on the intermediation and profitability approach. Fourteen alternative models with different inputs-outputs combinations were developed for the research purposes. To substantiate the variables selection for DEA model the received data was processed, using such methods, as correlation analysis, linear regression analysis, analysis of mean values, and two-samples Kolmogorov-Smirnov test. The research results assisted the authors in providing general recommendations about the variables selection for DEA application in the Latvian banking sector. The present research contributes to the existing analytical data on bank performance in Latvia. The empirical findings provide a background for further studies, in particular, the efficiency of Latvian banks could be analysed in the extended time period.
Highlights
Modern banking business has radically changed over the last decade
The goal of the paper is to substantiate the variables selection for Data Envelopment Analysis (DEA) model applied in the Latvian banking sector, improving the methodology of measuring efficiency of Latvian banks
The empirical findings provide a background for further studies; in particular, the results of testing research hypotheses allow to make a reasonable choice of DEA model specification
Summary
Modern banking business has radically changed over the last decade. As the result banks face an increasing competitive pressure from the foreign financial institutions and non-banking. J. Titko et al Measuring bank efficiency: dea application financial services providers. To survive in the competitive struggle and to achieve the overwhelming goal of shareholder wealth maximization, banks are forced to extend the range of traditional banking functions. Banks are intermediaries and liquidity providers, but they act as information channels, risk managers, drivers of innovations, etc. Due to the critically important role of financial institutions in the national economy bank performance is a frequently discussed topic in an academic environment
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