DEA and benchmarks – an application to Nordic banks

In this paper, Data Envelopment Analysis (DEA) is developed to analyze the efficiencyof a single bank. The inputs are given in terms of cost of personnel, cost of material andexpected cost of credit losses. Outputs concern lending, deposits and gross revenues (interestmargins and non-interest income). The data covers 48 large Nordic banks during the twoyears 1992 and 1993. Fourteen banks are from Denmark, thirteen from Finland, twelve fromNorway and nine from Sweden. For each of these banks, the DEA method is used to form a“reference bank”, which is a convex combination of the best competing banks (those at theefficiency frontier). The three inputs and the three outputs of the reference bank will beused as benchmarks. This procedure implies that one can only say that one single bank isless efficient than its reference bank, not less efficient than another bank. The results showthat 4-7 Nordic banks were situated at the efficiency frontier for those two years. Thesebanks should then be used to form reference banks for other banks, and to set benchmarksfor them. Such benchmarks would have been slightly different, dependent on the “window”to be used, 1992, 1993 or 1992 + 1993. Copyright Kluwer Academic Publishers 1998