Two-stage evaluation of bank branch efficiency using data envelopment analysis

• Published in: Omega (Oxford) Vol. 39; no. 1; pp. 99 - 109
• Main Authors: Paradi, Joseph C., Rouatt, Stephen, Zhu, Haiyan
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 2011; Elsevier; Pergamon Press Inc
• Series: Omega
• Subjects: Applied sciences; Bank branch network; Benchmarks; Branch banking; Data envelopment analysis; DEA; DEA Efficiency Bank branch network Two-stage evaluation process Multi-dimensional measurements; Decision theory. Utility theory; Efficiency; Exact sciences and technology; Line managers; Mathematics; Multi-dimensional measurements; Nonparametric inference; Operational research and scientific management; Operational research. Management science; Probability and statistics; Sciences and techniques of general use; Statistics; Studies; Two-stage evaluation process; Canada; DEA; Bank branch network; Efficiency; Multi-dimensional measurements; Two-stage evaluation process; Performance evaluation; Branching; Profitability; Banking; Benchmarking; Non parametric estimation; Manager; Modeling; Rejection; Dimensional control; Competitive intelligence; Localization; Data envelopment analysis
• ISSN: 0305-0483; 1873-5274
• DOI: 10.1016/j.omega.2010.04.002

There are two key motivations for this paper: (1) the need to respond to the often observed rejections of efficiency studies’ results by management as they claim that a single-perspective evaluation cannot fully reflect the operating units’ multi-function nature; and (2) a detailed bank branch performance assessment that is acceptable to both line managers and senior executives is still needed. In this context, a two-stage Data Envelopment Analysis approach is developed for simultaneously benchmarking the performance of operating units along different dimensions (for line managers) and a modified Slacks-Based Measure model is applied for the first time to aggregate the obtained efficiency scores from stage one and generate a composite performance index for each unit. This approach is illustrated by using the data from a major Canadian bank with 816 branches operating across the nation. Three important branch performance dimensions are evaluated: Production, Profitability, and Intermediation. This approach improves the reality of the performance assessment method and enables branch managers to clearly identify the strengths and weaknesses in their operations. Branch scale efficiency and the impacts of geographic location and market size on branch performance are also investigated. This multi-dimensional performance evaluation approach may improve management acceptance of the practical applications of DEA in real businesses.