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Using DEA to investigate bank safety and soundness – which approach works best?

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  • David Tripe

Abstract

Purpose - The purpose of this paper is to investigate use of efficiency analysis as a technique for investigating bank safely and soundness. Design/methodology/approach - Three different data envelopment analysis (DEA) models were applied to set of data for the major New Zealand banks over a ten‐quarter period – a CCR model, a profit efficiency model and a non‐oriented slacks‐based approach. Findings - Most useful results are obtained using the slacks‐based approach. Research limitations/implications - The period covered by the study was from late 2005 until early 2008, prior to the global financial crisis having major impacts on the New Zealand banking sector. Practical implications - The study is of particular value in the New Zealand context where there has historically not been any bank deposit insurance, obliging depositors to make their own assessments of bank safety and soundness. Originality/value - The paper makes a contribution to very small literature which uses efficiency analysis to explore bank safety and soundness. It also makes use of the slacks‐based DEA approach, which has not yet been widely used in the banking literature.

Suggested Citation

  • David Tripe, 2010. "Using DEA to investigate bank safety and soundness – which approach works best?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 2(3), pages 237-250, August.
    • Handle: RePEc:eme:jfeppp:v:2:y:2010:i:3:p:237-250
    DOI: 10.1108/17576381011085449
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    References listed on IDEAS

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    1. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
    2. Henry Tulkens & Philippe Eeckaut, 2006. "Nonparametric Efficiency, Progress and Regress Measures For Panel Data: Methodological Aspects," Springer Books, in: Parkash Chander & Jacques Drèze & C. Knox Lovell & Jack Mintz (ed.), Public goods, environmental externalities and fiscal competition, chapter 0, pages 395-429, Springer.
    3. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    4. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
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    6. E. Grifell-Tatjé & C. A. K. Lovell, 1999. "Profits and Productivity," Management Science, INFORMS, vol. 45(9), pages 1177-1193, September.
    7. Hartman, Thomas E. & Storbeck, James E. & Byrnes, Patricia, 2001. "Allocative efficiency in branch banking," European Journal of Operational Research, Elsevier, vol. 134(2), pages 232-242, October.
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