Abstract
Efficiency analysis is essential for the evaluation of banks’ performance. To estimate banks’ efficiency, we can apply different methods. Analysis of financial indicators is the most popular efficiency analysis method in banks, but the number of financial indicators can be really big and make the interpretation of the results more difficult. Another way to estimate efficiency measures is the nonparametric frontier method - Data Envelopment Analysis (DEA). This method has become increasingly popular in measuring bank efficiency in the countries with developed banking systems.The main aim of this article is to present the results of efficiency analysis, computed by means of both methods, i. e. the classical index of balance sheet characteristics and the non-parametric DEA method.The analysis was carried out in the biggest banks operating in Poland in 2000-2007. The empirical results show that the efficiency measures give a similar although not identical picture of Polish commercial banks’ performance. These results (yielded by both methods) are complementary to each other and suggest that the non-parametric DEA method is really valuable and worth applying in bank practice.The work presents also the reasons that would explain the achieved results. It also compares both methods, their potentials and limitations in applying them to banking.
Highlights
The intensive and continuously increasing competition in the financial services market creates a need for an access to information that would allow to evaluate commercial banks operating in this market
The authors, relying on Debreu and Farell's concept of productivity, in which the efficiency measure was defined as a ratio of a single input to a single output, applied the method in a multidimensional situation in which there were more than one outputs and more than one inputs
The proof of economic efficiency can be the fact that the examined unit is on the efficiency frontier which means that it fully utilizes the available resources and that it is not possible to increase the production of particular goods
Summary
The intensive and continuously increasing competition in the financial services market creates a need for an access to information that would allow to evaluate commercial banks operating in this market. Such evaluations are really essential to both bank owners and customers who expect high-level financial profits. To estimate banks' efficiency, we can use different methods. These methods can be classified in various ways. For the purpose of the present research, the traditional method of financial indices and the non-parametric DEA method were chosen to evaluate banks' efficiency. The parametric method was omitted as it requires defining the relation between inputs and performance and data over long periods of time
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