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

Asmild, Mette; Zhu, Minyan

Abstract

© 2016 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.

Citation

Asmild, M., & Zhu, M. (2016). Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis. European Journal of Operational Research, 251(3), 999-1015. https://doi.org/10.1016/j.ejor.2015.12.021

• Journal Article Type: Article
• Acceptance Date: Dec 14, 2015
• Online Publication Date: Dec 19, 2015
• Publication Date: Jun 16, 2016
• Deposit Date: Oct 13, 2016
• Publicly Available Date: Oct 13, 2016
• Journal: European Journal of Operational Research
• Print ISSN: 0377-2217
• Electronic ISSN: 0377-2217
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 251
• Issue: 3
• Pages: 999-1015
• DOI: https://doi.org/10.1016/j.ejor.2015.12.021
• Keywords: Data Envelopment Analysis (DEA), Weight restrictions, Banking, Efficiency, risk, Financial crisis, Regulation, benchmarks
• Public URL: https://nottingham-repository.worktribe.com/output/794717
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S0377221715011455