Inverted VEA for worst-practice benchmarking: With an application to distress prediction of European banks

In this paper we introduce managerial preferences in the assessment of worst-practices by means of Value Efficiency Analysis (VEA). Our model involves the choice of a Decision Making Unit (DMU) being on the worst-practice frontier, that has the least desirable input/output structure by view of a Decision Maker (DM). The method then assesses all DMUs based on the worst favorable sets of input/output weights for the chosen DMU. The scores of the associated linear program, referred to as Inverted VEA, are larger than or equal to the respective Inverted DEA scores. Higher (lower) differences between Inverted DEA and Inverted VEA scores highlight DMUs with an input-output bundle that is farther (closer) to the least desirable ones. This aids central management to identify DMUs which should be marked for closer monitoring and inspection or put through a restructuring process. We illustrate the usefulness of the method by applying it to assess the relative financial distress of 33 major European banks that were evaluated by the European Banking Authority in the 2018 stress test.