Assessing the efficiency of European banks: an empirical analysis with DEA

Abstract

Bank efficiency has been a major question of expository and observational writing within the final 20 years. Today, the increasingly competitive environment makes it inevitable to evaluate the performance of banks, which are among the most important elements of the financial system. Efficiency in the banking sector can be defined as the banks' fulfilling their financial functions using the least number of resources. Today, when globalization is spreading intensely to the world, banks falling into the low productivity trap do not have a chance to survive. In this context, it was necessary to closely monitor and measure the performance of banks in the field in which they compete, that is, the performance of banks in transforming their existing resources into output. For this purpose, efficiency analysis with DEA method is applied on the number of employees of banks, amount of loans, business volume, capital size and profitability. The aim of this thesis is to make a research about banking efficiency in the European Union, identifying the current situation of banking sector. Data from 112 different banks operating in the European Union were used to carry out this analysis. The first chapter provides a framework on general efficiency, the types of efficiencies, measurement of efficiency in the banking sector, financial characteristics of efficient banks and etc. In the second chapter I presented the methodology of analysis, more specifically ‘Data Envelopment Analysis’ and ‘Stochastic Frontier Analysis’ methods are examined in detail. The literature review about DEA model on banking efficiency is investigated in the third chapter and I put some articles about different DEA models and table containing detailed information of these articles as well. The last chapter is dedicated, totally, to the analysis of the results. Additionally, detailed explanations are made with graphs and tables. In this fourth chapter the input oriented CCR and BCC models are compared in depth, finally concluding with a comment on the results obtained by each bank and the sample as a whole.