Measuring the efficiency of banks using a two-stage dea model

Facing the biggest world-wide crisis of thelast 30 years, signifi cant losses in revenues areforeseen for the banking sector as well as anincreasing competitive pressure. Using datafrom 2007, this study evaluates the effi ciencyof the 37 major banks operating in Portugalthrough DEA methodology. Effi ciency isevaluated trough Chen and Zhu (2004) twostagemodel applied to the banking industry,circumventing the usual problem inherent inthe existence of two approaches (Production/Intermediation). The main contribution of thisstudy is the incorporation of new variables thatrefl ect, besides profi tability, value creation andrisk, such as intrinsic value added. It is usual toapply standard DEA models to each stage totypically two-stage processes. However, suchan approach may conclude that two ineffi cientstages lead to an overall effi cient DMU withthe inputs of the fi rst stage and outputs of thesecond stage. The distortion/improvement inthe DEA frontier is caused by the presence ofintermediate measures. Effi ciency is analyzedunder a global perspective including all banks,assuming that all access the same technology.Subsequent analysis is made to the effi ciencyby groups based on size/business and riskfactors, estimated separate frontiers, analyzedthe ineffi ciencies intra-groups and differencesamong groups.