170 J.A. Haslem et al. International Review of Economics and Finance 8 1999 165–182
here because the sample was truncated to ensure the banks shared the same form of production function. This resulted in a sample where, if anything, it was more difficult
to be incorrectly identified as efficient. This was not to say, for example, that the mix of activities represented by bank inputsoutputs did not differ. After all, it was these
inputoutput differences that were identified by DEA and provided the basis for normative guides to improved bank efficiency.
Another issue concerned the nonhomogeneity of the sample as measured by foreign domestic ownership of the banks Table 1. There was no a priori reason to believe
that this implied a difference in their underlying production function. Nonetheless, this issue was examined empirically and the findings are discussed below.
The year 1987 was selected because, as discussed above, this was the first year the unfolding LDC loan crisis was significantly recognized on bank financial statements.
And 1992 was selected as the “current” situation for purposes of analyzing bank efficiency. It was the latest year for which computer-ready data were available at the
time of the analysis.
5. Results of analysis
The application of DEA to each year’s final sample of 33 banks identified six 18.2 banks as inefficient in 1987 and seven 21.2 such banks in 1992. These
and the identified efficient sample banks are presented in Table 1. The thirteen total observations of inefficient banks included ten individual banks, of which seven were
inefficient in one year or the other and three were inefficient in both years.
Table 2 profiles the inputoutput variables of each of the six banks that were inefficient in 1987. The data were analyzed separately for each of the years 1987 and
1992 because the time frame of the study was inappropriate for pooling the data.
19
All six banks were identified as inefficient by delta, iota, and omicron. For example, Bank Leumi Bank 1 would somehow have had to decrease proportionately its inputs
by 16 1.0–0.84 to have been input efficient, and similarly increase its outputs by 19 1.19 2 1.0 to have been output efficient.
20
Overall, 64.8 of the total number of inputsoutputs 54 were inefficient, including 54.2 of the outputs and 73.3 of the inputs. It was found that management should
have focused on overall efficiency, but with particular attention to input variables, especially cash and real capital, and to foreign loans among the outputs.
Table 3 profiles the inputoutput variables of each of the seven banks that were inefficient in 1992. All seven banks were identified as inefficient by delta, iota, and
omicron. For example, Bank Leumi Bank 1 would somehow have had to decrease proportionately its inputs by 38 1.0 2 0.62 to have been input efficient, and
similarly increased its outputs by 48 1.48 2 1.0 to have been output efficient.
21
Overall, 54.0 of the total inputsoutputs 63 were inefficient, including 46.4 of the outputs and 60.0 of the inputs. Again, it was found that management should
have focused on overall efficiency, but here with particular attention to input variables especially cash and real capital and foreign loans among the outputs.
As derived from Tables 2 and 3, three banks were inefficient in both 1987 and
J.A. Haslem et al. International Review of Economics and Finance 8 1999 165–182 171
Table 1 Efficient and inefficient banks 1987 and 1992 samples
Inefficient in Efficient in
Institution 1987 and 1992
1987 1992
Bank of New York X
Banco Central Hispano-USA
a
X Bank of Canton of California
a
X Bank of Hawaii
X Bank of Tokyo Trust Company
a
X Banco de Bogota Trust Company
a
X Bank of California NA
a
X Continental Bank NA
X Corestates Bank NA
X Daiwa Bank Trust Company
a
X First National Bank of Boston
X First National Bank of Chicago
X FUJI Bank Trust Company
a
X Habib American Bank
a
X Harris Trust Savings Bank
a
X IBJ Schroder Bank Trust Company
a
X Morgan Bank Delaware
X Oceanic Bank
a
X Pacific National Bank
a
X Republic National Bank of NY
a
X State Street Bank Trust Company
X UBAF Arab American Bank
a
X Yasuda Bank Trust Company USA
a
X Bank Audi USA
a
X Bankers Trust Delaware
X Bank Leumi Trust Company of NY
a
X X
California American Bank
a
X Chinese American Bank
a
X X
Industrial Bank of Japan Trust Company
a
X Israel Discount Bank of New York
a
X Northern Trust Company
a
X Riggs National Bank of Washington
a
X X
UMB Bank Trust Company
a
X
a
minimum of 50 foreign ownership.
1992: Bank Leumi Trust, Chinese American Bank, and Riggs National Bank. For example, in both years Bank Leumi was deficient in foreign loans and had excess
cash, labor expense and real capital. Over the period, it became efficient in total investments, but developed excess materials expense.
These three banks were similar in the inputoutput variables that were inefficient.
22
Of the incidences of inefficiency, seven were inputs and four were outputs. There was no pattern, however, in the inputoutput variables that either became efficient or
inefficient over the period. This consistently inefficient management should also have
172 J.A. Haslem et al. International Review of Economics and Finance 8 1999 165–182
Table 2 Residual inefficiency and efficiency scores inefficient banks, 1987
Deficit outputexcess input inefficiency
a
Variables Appendix A Bank 1
Bank 2 Bank 3
Bank 4 Bank 5
Bank 6 Outputs
Loans—foreign 63
23 66
49 72
92 Loans—domestic
— —
17 91
5 —
Total investments 23
56 —
— —
— Noninterest-bearing deposits
— 24
— —
— 30
Inputs Cash
96 29
565 152
72 108
Labor expense 12
22 204
51 —
26 Real capital
46 7
88 197
44 17
Materials expense —
4 3
— 2
22 Total borrowed funds
— —
83 —
— —
Efficiency scores Iota 1.0 5 efficient
0.84 0.24
0.08 0.44
0.34 0.65
Omicron 1.0 5 efficient 1.19
2.65 3.32
2.41 2.15
1.55 Delta 0.0 5 efficient
2.91 2.42
4.58 12.42
3.32 12.26
Bank 1 5 Bank Leumi Trust Co. of NY; Bank 2 5 Industrial Bank of Japan Trust Co.; Bank 3 5 Israel Discount Bank of NY; Bank 4 5 Chinese American Bank; Bank 5 5 Riggs National Bank of
Washington; Bank 6 5 California Commerce Bank.
a
Output inefficiency represents deficit outputs and input efficiency represents excess inputs; none of the inefficiency is proportional. To calculate residual inefficiency: 1 subtract actual data value for each
variable from its efficient frontier value, which equals “amounts of residual inefficiency” stated in absolute terms; and 2 divide this amount by the efficient value, which equals “residual inefficiency”
stated as percentage. These percentages are provided to enrich each bank’s presentation. They are not standardized for interyear comparisons and are, therefore, not discussed in the text.
focused on overall efficiency, but here with particular attention to input variables, especially real capital, and to foreign loans among the outputs.
Also as derived from Tables 2 and 3, three banks were inefficient in 1987 only efficient in 1992: Industrial Bank of Japan, Israel Discount Bank, and California
Commerce Bank. For example, in 1987 Industrial Bank of Japan was deficient in foreign loans, total investments and noninterest-bearing deposits, and had excess cash,
labor expense, real capital and materials expense. Between 1987 and 1992, it went from being inefficient in seven of nine inputsoutputs to efficient in all variables.
These three banks had some pattern of change in their inputoutput variables and, overall, thirteen of the twenty changes were inputs and seven were outputs.
23
In 1992, newly efficient management correctly focused on overall efficiency, but also gave
particular attention to input variables, especially cash, labor expense, real capital and materials expense, and to foreign loans among the outputs.
As further derived from Tables 2 and 3, four banks were inefficient in 1992 only efficient in 1987: Bank Audi USA, UMB Bank Trust, Bankers Trust Delaware,
and Northern Trust. For example, in 1992 Bank Audi USA Bank 2 was deficient in foreign loans, total investments and noninterest-bearing deposits, and had excess
J.A. Haslem et al. International Review of Economics and Finance 8 1999 165–182 173
Table 3 Residual inefficiency and efficiency scores inefficient banks, 1992
Deficit outputexcess input inefficiency
a
Variables Appendix A Bank 1
Bank 2 Bank 3
Bank 4 Bank 5
Bank 6 Bank 7
Outputs Loans—foreign
81 93
100 83
57 66
84 Loans—domestic
— —
53 8
— —
— Total investments
— 22
— 6
— —
3 Noninterest-bearing deposits
— 65
— —
— —
— Inputs
Cash 94
344 1148
220 225
— 9
Labor expense 6
— —
— —
15 19
Real capital 168
45 176
51 232
251 —
Materials expense 52
61 —
119 304
142 —
Total borrowed funds —
— 174
— —
— —
Efficiency scores Iota 1.0 5 efficient
0.62 0.40
0.93 0.55
0.88 0.81
0.65 Omicron 1.0 5 efficient
1.48 2.79
1.08 1.97
1.13 1.22
1.49 Delta 0.0 5 efficient
5.90 16.72
. 99.00
6.61 3.49
3.34 5.38
Bank 1 5 Bank Leumi Trust Co. of NY; Bank 2 5 Bank Audi USA; Bank 3 5 Chinese American Bank; Bank 4 5 UMB Bank Trust Co.; Bank 5 5 Bankers Trust Delaware; Bank 6 5 Riggs National
Bank of Washington; Bank 7 5 Northern Trust Co.
a
See Table 2 notes for calculations and comments.
cash, real capital and materials expense. Between 1987 and 1992, it went from being efficient in all variables to inefficient in six of nine inputsoutputs.
These four banks had some pattern of change in their inputoutput variables and, overall, eleven of the twenty changes were inputs and nine were outputs.
24
In 1992, newly inefficient management should have focused on overall efficiency, with particu-
lar attention to input variables, especially cash, and to foreign loans among the outputs. As noted in Table 2 and above, 1987 DEA-identified inefficient banks were deficient
in foreign loans, which was inconsistent with the huge LDC loan losses in that year. Further, as seen in Table 4, identified inefficient banks had higher returns than efficient
banks in five of six profitability measures: consolidated net income to consolidated total assets, consolidated net income to total equity capital, foreign net income to
consolidated total assets, foreign net income to foreign total assets, domestic net income to domestic total assets, but not domestic net income to consolidated total
assets. With the exception of foreign net income to foreign total assets, all of their returns were positive. Further, the returns on domestic activities were higher than on
foreign activities.
On the other hand, 1987 identified efficient banks had negative returns on their overall and foreign activities and positive returns on their domestic activities. Thus,
with one inefficient bank exception, both efficient and inefficient banks had negative returns on their foreign activities, which were again expected because of the large
loan writeoffs. But the higher returns of inefficient banks on foreign activities, as well
174 J.A. Haslem et al. International Review of Economics and Finance 8 1999 165–182
Table 4 Mean of profitability performance ratios: Efficient vs. inefficient banks 1987 and 1992 samples
1987 1992
Efficient banks Inefficient banks
Efficient banks Inefficient banks
Variable n 5 27
n 5 6 n 5 26
n 5 7 NI
C
TA
C
2 0.19 L
0.34 H 0.50 H
0.11 L NI
C
TEC
C
2 6.92 L
5.80 H 6.09 H
2 0.26 L
NI
F
TA
C
2 0.53 L
0.04 H 0.30 H
0.10 L NI
D
TA
C
0.34 H 0.30 L
0.21 H 0.01 L
NI
F
TA
F
2 2.21 L
2 0.13 H
1.13 H 0.21 L
NI
D
TA
D
0.44 L 0.52 H
0.25 H 0.08 L
Variables are defined in Appendix A. H 5 highest variable value: efficient vs. inefficient banks, same year; L 5 lowest variable value: efficient vs. inefficient banks, same year.
as three of the other four profitability measures, contradicted the positive focus on foreign loans in DEA-efficient banks.
A related issue, mentioned above, concerned whether there was a difference in efficiency of foreign versus domestic-owned banks. As seen in Table 1, fifteen of the
twenty-three banks that were efficient in both 1987 and 1992 were at least 50 foreign owned, as were seven of the ten banks that were inefficient in either or both 1987
and 1992. Chi-square was used to test this question empirically.
25
The results were most consistent and found no significant difference in the inputoutput efficiency of
these foreign and domestic-owned banks. These results were also consistent with Haslem, Scheraga and Bedingfield 1993, where no differences were found in the
the balance sheet strategies of foreign and domestic-owned U.S. banks.
6. Interpretation of findings
