Pitching DEA Against SFA in the Context of Chinese Domestic Versus Foreign Banks

Necmi Kemal Avkiran () and Yushu (Elizabeth) Zhu ()
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Necmi Kemal Avkiran: UQ Business School, The University of Queensland
Yushu (Elizabeth) Zhu: UQ Business School, The University of Queensland

Chapter Chapter 5 in Handbook of Operations Analytics Using Data Envelopment Analysis, 2016, pp 113-143 from Springer

Abstract: Abstract The primary motivation is to show how the efficient frontier methods data envelopment analysis (DEA) and stochastic frontier analysis (SFA) can be used synergistically. As part of the illustration, we directly compare locally incorporated foreign banks with Chinese domestic banks. Both DEA and SFA reveal that foreign banks are less efficient. DEA shows the main source of inefficiency for foreign banks as managing interest income, whereas domestic banks are inefficient in managing non-interest income and interest expense. SFA reveals contextual variables such as interbank ratio, loan-to-deposit ratio and cost-to-income ratio are significant in explaining inefficiency. The correspondence of rankings based on DEA vs. SFA is positive and moderate in strength but efficiency estimates do not belong to the same distribution. Using DEA and SFA side-by-side can encourage more rigorous and in-depth bank efficiency studies where each method’s limitation can be overcome by the other.

Keywords: Technical efficiency; Scale efficiency; Data Envelopment Analysis; Stochastic frontier analysis; Single-output Translog function; Multi-output Translog distance function; Cobb-Douglas function; Robustness testing; Chinese banks; Efficiency spillovers; Profitability; Potential improvements; Efficiency contribution measure (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/978-1-4899-7705-2_5

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