Fai Keung Tam

Bank Branch Operational Studies Using DEA

We know how flexible DEA is in exposing inefficiencies and productivity deficiencies in many industries and situations. These studies can focus on an individual firm, be international in scope, or even guide two banks in merging their operations. As most studies are constrained by what data are available, the model builder must accept the data as is and take this into account. Overall, several innovative uses of DEA are shown in this section.

DEA Models Overview

We begin with the basic DEA Models and some useful extensions (although we expect that some will see it as too much while others as too little). While we promised to minimize the mathematics, some are, unfortunately, unavoidable. We have excluded any specific discussion of the underlying linear programming (LP) mathematics that drives DEA, and while some general understanding of this is helpful for understanding the academic literature, it is not needed to understand the benefits and ways to apply DEA.

Survey of Other Financial Services Literature

Unlike in banking, DEA has not been used in other financial services as many times as one would have thought. Still some work has been done on other types of financial services, and in this Part, we will look at some domains where such work was done: thrifts, insurance, investment funds, and stock selection. While there are papers in these specific areas, there are gaps in the coverage of these institutions which offers researchers and practitioners attractive opportunities to enhance productivity and gain new insights into these institutions. Harnessing DEA in the process to improve performance in these very complex industries show the flexibility of the technology even if it has to be combined with other approaches such as Bayesian networks, neural networks, and decision trees to achieve the desired goals.

Bank Branch Productivity Applications: Managing Bank Productivity

This is an example of how one bank used DEA to make real and substantial improvement in its branch productivity and profits, while maintaining service quality (Sherman HD (1989) Service Organization Productivity Management – Highlights Edition. The Society of Management Accountants of Canada, Hamilton). Over

Bank Branch Productivity Applications: Focused Applications to Improve Performance

6 million USD of annual expense savings not identifiable with traditional financial and operating ratio analysis were identified in this 33 branch system. This study is one of the most cited DEA banking papers as it was one of the earliest to study branches with DEA.

Securities Market Applications: Stock Market Valuation of Securities and Financial Services – Insights with DEA

There is a saying that what you cannot measure, you cannot manage well. Senior management struggles to find fair and equitable measurements of performance in terms of productivity, efficiency and effectiveness. But there is often a “push back” from those being measured – a process nobody likes. The reader will discover in the following cases how effectively DEA can be used, and that its recommendations are harder to argue against than some other types of measurements where fairness is harder to prove.

Survey of the Banking Literature

There has also been a fair degree of interest in the application of DEA in the securities markets. Studies have primarily focused on employing DEA to assess (i.e. measure efficiency and rank) investment funds, and to select securities for investment and portfolio construction. These studies have been briefly discussed in Chap. 3. This part of the book will provide a more detailed consideration of three applications within this domain, specifically in the area of securities valuation, an important component of the securities selection decision.

Financial Services Beyond Banking: Corporate Failure Prediction

There are a large number of papers in the literature on banking from many different stances. Survey papers (see below) show the diversity of the approaches taken by many of the authors to the problem. Most of the work considered banks as the DMUs as this is useful for the regulator or for comparisons with banks in other countries. Many of the bank branch papers treated a branch as the DMU and could yield more managerially useful literature – but neither of these statements is absolute as there are many well supported arguments for both types of studies. It should be noted that there are hundreds of papers on banking and the following are just our selection of the highlights of this literature.

Banking Corporation Studies: In-Country Studies

The problem of predicting corporate failures and bankruptcies has been an important concern for investors, executives and business partners. The owners of the bankrupt firm suffer legal, financial and personal consequences (e.g. damage to their reputation and business relationships, and difficulty in obtaining credit in the future) and the effect on the firm’s employees. Furthermore, owners can use this information to potentially take corrective action and prevent failure.

Financial Services beyond Banking: Insurance

The motivation for this book was to offer guidance and examples to the analyst and practitioner, and to expose them to the flexibility DEA has to improve operations. This view of “culture” (how things are done now) encompasses such issues as the setting or conditions in which the banking activity is carried out, e.g. regulatory and corporate rules, geographical difficulties and many others. Finally, banking is very different between developed and developing nations, so the examples here demonstrate both the relatively easy modeling process in DEA and the characteristics of large but still developing nations.