Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis

Abstract

We propose a method for bank efficiency assessment, based on weight restricted DEA, that limits banks' abilities to use extreme weights, corresponding to extreme judgements of the risk adjusted prices on funding sources and assets. Based on a data set comprising the largest European banks during the financial crisis, we illustrate the impact of the proposed weight restrictions in two different efficiency models; one related to banks' funding mix and one related to their asset mix. The results show that using a more balanced set of weights tend to reduce the estimated efficiency scores more for those banks which were bailed out during the crisis, which confirms the potential bias within standard DEA that does not control for extreme weights applied by highly risky banks. We discuss the use of the proposed method as a regulatory tool to constrain discretion when complying with regulatory capital benchmarks such as the Basel regulatory capital ratios.

The Social Efficiency for Sustainability: European Cooperative Banking Analysis

“…Multiple objectives might consider for example, the priority of workers' interests [46] to the detriment of economic performance, as might occur when decision-making bodies do not correspond to capital, but mainly to workers and customers. Previous studies [5,13,14,[47][48][49], have focused on the economic efficiency of banks that will prevail because of the sine-qua-non need for existence, the main objective of any bank. Cooperative banks focus on social aspects and are legitimated by society to create value for stakeholders [2,15,34].…”

Can More Environmental Information Disclosure Lead to Higher Eco-Efficiency? Evidence from China

“…In this study, four variables are selected according to data availability, namely, carbon dioxide emission which is estimated using the procedure suggested by Huang et al [45], volume of industrial waste water discharged, volume of sulfur dioxide emission, and volume of industrial soot-dust removed. A potentially unfortunate consequence of the conventional DEA is that extreme values of inputs or outputs result in extreme weights such that some DMUs become "efficient by default" [46]. A widely applied approach to address this issue is generate an entropy-weighted index of multiple factors [47,48].…”

Developing Crisis Management Model for Second-Tier Banks in the Post-Crisis Period of Economy Development in the Republic of Kazakhstan

“…The main advantage of this method is the availability of information support, ease of calculation and interpretation of indicators (Mayer, 2013;Asmild and Zhu, 2015). However, this conceptual approach has a significant drawback in practice: A quantitative assessment of the values of financial coefficients, exceedance of which reflects the threat of reducing financial stability, based on the account of regularities existing in the world practice.…”