Performance evaluation of banking sector by using DEA method

Abstract

Performance evaluation of financial institutions is crucial for the development and improvement of financial system and the whole national economy. Most of traditionally structured financial systems, particularly those in the post-transition EU countries, are strongly determined by the domination of banking sector and underdeveloped financial markets. Nevertheless, research of banking performance can be further improved as a stimulus for the further development of financial system and to provide important information for creditors, investors and stakeholders. The efficiency of financial institutions has been widely and extensively studied in the recent years. In this paper, the Data Envelopment Analysis (DEA) method is applied. This nonparametric approach has become one of the most commonly used methods in measuring technical and cost efficiency of financial institutions. The purpose of this paper is to determine factors, i.e., inputs and outputs of models which evaluate the relative efficiency of banking sector as well as the relative efficiency of particular banking institutions. The paper emphasizes a number of variables that can be used in DEA models for banking institutions, for example asset value, number of employees, interest and non-interest income, deposits and loans. The main results of the research will be the comparative analysis of different theoretical and empirical scientific research regarding banking sector evaluation especially for the new EU member countries, including Croatia. Although authors present the research achievements of the relative efficiency of banking sector, this can be the basis for further empirical studies of banking sector efficiency measurement.