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Pitching DEA Against SFA in the Context of Chinese Domestic Versus Foreign Banks

In: Handbook of Operations Analytics Using Data Envelopment Analysis

Author

Listed:
  • Necmi Kemal Avkiran

    (UQ Business School, The University of Queensland)

  • Yushu (Elizabeth) Zhu

    (UQ Business School, The University of Queensland)

Abstract

The primary motivation is to show how the efficient frontier methods data envelopment analysis (DEA) and stochastic frontier analysis (SFA) can be used synergistically. As part of the illustration, we directly compare locally incorporated foreign banks with Chinese domestic banks. Both DEA and SFA reveal that foreign banks are less efficient. DEA shows the main source of inefficiency for foreign banks as managing interest income, whereas domestic banks are inefficient in managing non-interest income and interest expense. SFA reveals contextual variables such as interbank ratio, loan-to-deposit ratio and cost-to-income ratio are significant in explaining inefficiency. The correspondence of rankings based on DEA vs. SFA is positive and moderate in strength but efficiency estimates do not belong to the same distribution. Using DEA and SFA side-by-side can encourage more rigorous and in-depth bank efficiency studies where each method’s limitation can be overcome by the other.

Suggested Citation

  • Necmi Kemal Avkiran & Yushu (Elizabeth) Zhu, 2016. "Pitching DEA Against SFA in the Context of Chinese Domestic Versus Foreign Banks," International Series in Operations Research & Management Science, in: Shiuh-Nan Hwang & Hsuan-Shih Lee & Joe Zhu (ed.), Handbook of Operations Analytics Using Data Envelopment Analysis, chapter 0, pages 113-143, Springer.
    • Handle: RePEc:spr:isochp:978-1-4899-7705-2_5
    DOI: 10.1007/978-1-4899-7705-2_5
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    Cited by:

    1. Necmi Kemal Avkiran, 2017. "An illustration of multiple-stakeholder perspective using a survey across Australia, China and Japan," Annals of Operations Research, Springer, vol. 248(1), pages 93-121, January.

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