MEASURING THE EFFICIENCY OF BANKS USING A TWO-STAGE DEA MODEL

Abstract

Facing the biggest world-wide crisis of the
last 30 years, signifi cant losses in revenues are
foreseen for the banking sector as well as an
increasing competitive pressure. Using data
from 2007, this study evaluates the effi ciency
of the 37 major banks operating in Portugal
through DEA methodology. Effi ciency is
evaluated trough Chen and Zhu (2004) twostage
model applied to the banking industry,
circumventing the usual problem inherent in
the existence of two approaches (Production/
Intermediation). The main contribution of this
study is the incorporation of new variables that
refl ect, besides profi tability, value creation and
risk, such as intrinsic value added. It is usual to
apply standard DEA models to each stage to
typically two-stage processes. However, such
an approach may conclude that two ineffi cient
stages lead to an overall effi cient DMU with
the inputs of the fi rst stage and outputs of the
second stage. The distortion/improvement in
the DEA frontier is caused by the presence of
intermediate measures. Effi ciency is analyzed
under a global perspective including all banks,
assuming that all access the same technology.
Subsequent analysis is made to the effi ciency
by groups based on size/business and risk
factors, estimated separate frontiers, analyzed
the ineffi ciencies intra-groups and differences
among groups.