A DEA model for measuring financial intermediation

Abstract

It is common practice in data envelopment analysis to assess commercial banks by the efficiency that they display in their operations under different outlooks on their behaviour; yet, even the intermediation approach does not measure actually the success with which commercial banks or a banking sector fulfil their mission of financial intermediaries. Such an assessment is traditionally accomplished by means of the loan-to-deposit ratio that captures rather size or depth of financial intermediation, but no link is sought to best practices that are observed in the banking sector. The paper proposes a model of financial intermediation that permits assessing on a comparative basis the attainment in financial intermediation. The devised index of financial intermediation recognizes through weights that diverse outcomes of financial intermediation exhibit differentiated importance to the economy and is closely connected with the weighted slacks-based measure (WSBM). The WSBM that emerges in this respect encompasses only production variables that define financial intermediation (i.e. deposits and intermediated outputs) whilst other production variables are treated as non-discretionary. The model can be applied in variants for a single commercial bank in one specific year (Model I) or for aggregated bank-years such as one particular bank over the entire period or various banks in one year (Model II). The ideas are demonstrated on a data set of Slovak commercial banks for the period between 2008 and 2016 and the difference of the proposed approach with traditional efficiency measurement under the intermediation approach is discussed.