Academic journal article Journal of Southeast Asian Economies

Measuring the Technical Efficiency of Banks in Singapore for the Period 1993-99: An Application and Extension of the Bauer et Al. (1997) Technique

Academic journal article Journal of Southeast Asian Economies

Measuring the Technical Efficiency of Banks in Singapore for the Period 1993-99: An Application and Extension of the Bauer et Al. (1997) Technique

Article excerpt

I. Introduction

Over the past two decades, the measurement of financial institution efficiency using non-parametric frontier models has received considerable attention. However, while the literature on the application of data envelopment analysis (DEA) to the area of bank efficiency measurement is burgeoning, research on the salient properties of efficiency scores as a tool of policy is comparatively rare. The paucity of empirical research in this key area seems perplexing, especially when one recognizes that policy-makers need accurate assessments about the effects of their decisions on the institutions they supervise.

Only two studies have been identified to date within this tradition of the bank efficiency measurement literature. The first is Bauer, Berger, Ferrier, and Humphrey (1997), which specified a formal set of conditions that efficiency rankings derived from various frontier methods should meet in order to be useful in a policy role. The second is Barr, Killgo, Siems, and Zimmel (1999), which attempted to investigate the properties of DEA efficiency scores by studying the relationship between these scores and traditional measures of bank performance. It is surprising that DEA researchers elsewhere have not paralleled these developments in their work on efficiency measurement in financial services. In order to rectify this neglect, this paper attempts to examine the characteristics of DEA scores empirically, drawing on the approach of Bauer et al. (1997), using three alternate DEA specifications and Singaporean bank data for the period 1993 to 1999.

Singapore has moved decisively to liberalize the banking sector, which until the financial crisis of 1997-98, was relatively sheltered from international competition. The Committee on Banking Disclosure recommendations, which came in the wake of the crisis in 1998, was an important part of the financial reforms aimed at making Singapore a world-class financial centre.

The success of these initiatives will determine whether Singapore is to remain a destination of choice for global investors. Nonetheless, with further freeing of trade and services imminent, it is clear that the current emphasis on microeconomic reform will continue. Key aspects of these reforms include those concerning comparative performance assessment and process benchmarking, optimum scale size, and the impact of consolidation. The need for the application of improved productivity measurement in the realms of financial services is indisputable, especially as the interest in efficient outcomes has grown with the magnitude of the resources involved and the increasing national emphasis on microeconomic reform.

The paper itself is divided into seven main sections. Section II seeks to provide a synoptic overview of the empirical measurement of bank efficiency. Section III deals with the perplexing problems associated with defining bank output. The question of the determinants of bank efficiency is examined in section IV. Section V discusses the institutional characteristics of the Singaporean banking system. The research methodology is outlined in section VI, and section VII analyses the results obtained from the estimation procedures. The paper ends with some brief concluding comments in section VIII.

II. The Empirical Measurement of Bank Efficiency

DEA is often used as a quantitative technique to measure the relative efficiency (or productivity) of organizations in the same industry. It is typically the preferred measure of relative efficiency for complex organizations in complex environments because it readily lends itself to the analysis of multiple output organizations, especially where binding constraints affect the behaviour of the organizations in question. In essence, DEA combines all the input and output information on the firm into a single measure of productive efficiency that lies between zero (i.e., a completely inefficient firm) and unity (i. …

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