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 bankyears 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. KeywordsFinancial intermediation • Loan-to-deposit ratio • Data envelopment analysis (DEA) • Weighted slacks-based measure (WSBM) • Aggregation over years or banks JEL Classification G20 • E59 • O50

Comparison of factors influencing liquidity of European Islamic and conventional banks

“…To make the investigation complete, perhaps a holistic approach is needed to complement the present research. One example in this respect is Boďa and Zimková (2021a) who perform an analysis first for micro-units, and then in aggregate form for the entire financial sector. Similarly, Boďa and Zimková (2021a) analyse banking systems and compare them by using aggregate financial indicators.…”

“…One example in this respect is Boďa and Zimková (2021a) who perform an analysis first for micro-units, and then in aggregate form for the entire financial sector. Similarly, Boďa and Zimková (2021a) analyse banking systems and compare them by using aggregate financial indicators. However, such an undertaking requires that Islamic and conventional banks may be considered as different banking systems.…”

A Novel Hybrid Parametric and Non-Parametric Optimisation Model for Average Technical Efficiency Assessment in Public Hospitals during and Post-COVID-19 Pandemic

“…In a general view, scientists commonly utilised the DEA in the financial sector [ 58 , 59 , 60 , 61 , 62 ] and other sectors [ 20 , 63 , 64 , 65 , 66 , 67 ]. Moreover, in many studies, the researchers employed techniques to estimate hospital efficiencies, such as SFA and DEA.…”

UK Government controls and loan-to-deposit ratio

“…LTD ratio will fluctuate around its trend to reflect the short-term financial cycles, government policies and macro-economic factors. While LTD may not be fully appreciated by the academic community, it is a regulatory standard used by central banks (Office of the Comptroller of the Currency, 2016; DiSalvo and Johnston, 2017; European Banking Authority, 2017; Boďa and Zimková, 2020). Since the 2007–2008 financial crisis, there has been increasing focus on the use of LTD as a measure of liquidity and a tool for macro prudential policy to mitigate liquidity risk (Goodhart, 2014; Van den End, 2016; Satria et al , 2016; Boďa and Zimková, 2020, 2021) and a predictor of bank vulnerability to crises (Jordà et al , 2021).…”

“…While LTD may not be fully appreciated by the academic community, it is a regulatory standard used by central banks (Office of the Comptroller of the Currency, 2016; DiSalvo and Johnston, 2017; European Banking Authority, 2017; Boďa and Zimková, 2020). Since the 2007–2008 financial crisis, there has been increasing focus on the use of LTD as a measure of liquidity and a tool for macro prudential policy to mitigate liquidity risk (Goodhart, 2014; Van den End, 2016; Satria et al , 2016; Boďa and Zimková, 2020, 2021) and a predictor of bank vulnerability to crises (Jordà et al , 2021). By way of Trend analysis and Panel Regression, we examine the impact of changing severity of government controls on LTD ratio for the period 1945–2012 for Major British Banking Group (MBBGs) [1].…”