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Measuring the Efficiency in the Lithuanian Banking Sector: The DEA Application

Lina Novickytė () and Jolanta Droždz ()
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Lina Novickytė: Division of Farms and Enterprises Economics, Lithuanian Institute of Agrarian Economics, V. Kudirkos st. 18–2, Vilnius LT-01113, Lithuania
Jolanta Droždz: Faculty of Economics and Business Administration, Vilnius University, Sauletekio ave. 9 (II bldg.), Vilnius LT-10221, Lithuania

International Journal of Financial Studies, 2018, vol. 6, issue 2, 1-15

Abstract: The purpose of this study is to examine the efficiency of the banks in Lithuania by employing the DEA method and evaluate bank performance in a low interest rate environment. The efficiency scores were calculated with a non-parametric frontier input-oriented DEA technique with the variable returns to scale (VRS) and the constant returns to scale (CRS) assumptions. Five alternative models with different input-output combinations were developed, based on production, profitability and intermediation dimensions. The main bank profitability measure—the return on assets (ROA) ratio—was employed to validate the results obtained using the DEA method. The Lithuanian bank’s efficiency analysis based on the VRS assumption shows that better results are demonstrated by the local banks. The technical efficiency analysis based on the CRS assumption shows other results: the banks owned by the Nordic parent group and the branches have higher pure efficiency than local banks and have success at working at the right scale. Based on this, it stated that during the 2012–2016 period the larger Lithuanian banks (subsidiaries) applied a more appropriate business model than smaller (local) banks operating in Lithuania. Additionally, this research contributes to the scholarly literature in the field of determinants of bank business performance in concentrated markets dominated by foreign banks and, in particular, from one region.

Keywords: efficiency; banks; data envelopment analysis (DEA); input-output; non-parametric methods (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 F2 F3 F41 F42 (search for similar items in EconPapers)
Date: 2018
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