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

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.