benchmarkingtheefficiencyofu.sbanksaten-yeardea-.pptVIP

Benchmarking the Performance of US Banks R. Barr, SMU T. Siems, Federal Reserve Bank of Dallas S. Zimmel, SMU Financial Industry Studies, Dec. 1998: Motivations and Goals Motivations Safety and soundness of banking system Protection of FDIC insurance fund Best allocation of examiner resources Goals Prioritization of on-site examinations Early-warning indicators of troubled banks Objectives of the Research Benchmark the U.S. banking system over the last decade Assess performance with DEA-based model Isolate best- and worst-practice banks Support bank auditors by predicting trouble Evaluate DEA in large-scale benchmarking role Previous Work Measuring bank management quality with DEA Barr, Seiford, Siems, 1993 Bank Failure Prediction Model DEA score as input to logit forecasting model Barr and Siems, 1996 Technical report versions available at: /~barr Data Envelopment Analysis A methodology for integrating and analyzing benchmarking data that: Performs a multi-dimensional “gap analysis” Considers interactions, tradeoffs, substitutions Integrates all performance measures Gives an overall performance rating Suggests credible organizational goals, benchmarking partners, …. Bank Performance Model Defining Efficiency Efficiency = ratio of weighted sums of the inputs and outputs (0) Defines best practice in a DEA model How DEA Works Instead of using fixed weights for all units under evaluation, DEA computes a separate set of weights for each bank Weights optimized to make that bank’s score the best possible Constraints: no bank’s efficiency exceeds 1 when using the same weights Formulating a DEA Model There are many DEA models The basic idea in each is to choose a set of weights for DMU k that: Measuring Distance Introducing Expert Judgment Classic models may result in unreasonable weight assignments for inputs outputs e ? 0 weights on unflattering dimensions Can overemphasize secondary factors We added weight multipliers to the DEA Based on survey of 12 FRB bank e