CAMELS-DEA in assessing the role of major factors in achieving higher efficiency levels: evidence from Turkish banks

Abstract

This study investigates the efficiency of Turkish banks from 2010 to 2023 under unconventional central bank monetary policies, a departure from studies in developed economies using Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity (CAMELS) ratings. This study involves two stages. In the first stage, we calculate the efficiency scores of Turkish banks through a CAMELS ratings-based data envelopment analysis (CAMELS-DEA) model with two enhancements. Then, in the second stage, we conduct static and dynamic panel data analysis, relating these CAMELS-DEA efficiency estimates to factors and economy-wide variables thought to impact the banks’ efficiency levels, capturing cross-sectional variations across entities and mitigate potential endogeneity bias by incorporating lagged dependent variables as instruments. The study reveals a significant relationship between Turkish bank efficiency, size, and type, with public capital deposit banks as well as banks with the highest number of branches displaying superior performance. The results show that unemployment rate, government debt, exchange rate, and inflation rate have a meaningful impact on banking efficiency. Government debt and exchange rate have an inverse relationship with efficiency while the remaining variables are positively correlated. These findings underline the potential for rising inflation to trigger financial instability after abrupt and unforeseen inflation spikes.