Using trade-offs for measuring bank performance: A network DEA approach

This paper applies the relational network data envelopment analysis model in order to examine the efficiency of the largest banks in USA before, during and in the aftermath of the Global Financial Crisis. The network model preserves the dual role of deposits by treating them as an intermediate variable, thus providing a solution to the deposits’ dilemma. Furthermore, we incorporate non-performing loans into to our analysis by modifying the traditional relational network model. We assume that non-performing loans are not by-products of the “good” loans and we apply the trade-off approach (Podinovski, 2004) in order to avoid the unlimited production of the bad outputs. The trade-off approach by using realistic production trade-offs ensures that the traditional concept of efficiency as a realistic improvement factor remains intact. In addition, further use of production trade-offs is examined in order to improve the discrimination of the final model. The results reveal a large dispersion of inefficiency levels among USA banks and confirm the impact of the Global Financial Crisis on their performance.