Online Papers

CMTE papers by year of publication. [Not exhaustive, more to be updated...]


Best practice analysis of bank branches: An application of DEA in a large Canadian bank
C Schaffnit, D Rosen, JC Paradi

European Journal of Operational Research - Volume 98, Issue 2, 16 April 1997, Pages 269-289

This paper presents a best practice analysis of the Ontario based branches of a large Canadian bank. Consistent with managerial goals, the analysis focuses on the performance of branch personnel; it considers as outputs both transactions and maintenance work. To sharpen our efficiency estimates, we use DEA AR models with output multiplier constraints based on standard transaction and maintenance times. A model that adds similar constraints on the input multipliers, based on personnel salary, is used to find the cost efficient branches, and estimate “allocative” efficiency. Special emphasis is placed on quantifying and discussing the impact of model choice on the results. Post-hoc statistical tests are performed to investigate the impact of several external factors on personnel efficiency as well as the effects of efficiency on quality and profitability.

Author Keywords
Data Envelopment Analysis; Efficiency; Banking



Marginal Rates and Two-dimensional Level Curves in DEA
D Rosen, C Schaffnit, JC Paradi

Journal of Productivity Analysis - Volume 9, Number 3 / March, 1998

Of great importance to management, the computation of trade-offs presents particular difficulties within DEA since the piecewise linear nature of the envelopment surfaces does not allow for unique derivatives at every point. We present a comprehensive framework for analyzing marginal rates, and directional derivatives in general, on DEA frontiers. A useful characterization of these derivatives at given points can be provided in terms of the ranges they can take; equivalently, the bounds of these ranges correspond to derivatives ldquoto the rightrdquoand ldquoto the leftrdquo at these points. We present two approaches for their computation: first, the dual equivalents calculation of minimum and maximum multiplier ratios / finite differences, and then a modified simplex tableau method. The simplex tableau method provides a more general application of the method introduced by Hackman et al. (1994) to generate any two-dimensional section of the isoquant and is a practical tool to generate level plots of the frontier. By giving a complete picture of trade-offs and allowing a better visualization of high dimensional production possibility sets, these tools can be very useful for managerial applications.

Author Keywords
Data Envelopment Analysis - marginal rates - trade-offs - partial derivatives - piecewise linear surfaces - returns to scale




Internet - The Future Delivery Channel for Banking Services?
G Yan, JC Paradi

Thirty-First Annual Hawaii International Conference on System Sciences-Volume 4 p. 0290, 1998

Much has happened in the world of Internet banking since we started examining the parameters of bank participation and the potential risks involved in Internet banking from a customer's point of view in our previous study. In order to assess the importance of the Internet as a future delivery mechanism for the banking industry, we now focus on the potential risks involved in offering Internet services from the banks' point of view. By correlating the risks perceived by both customers and banks with the actual Internet services offered, we provide a more complete picture of the requirements and concerns in this new way of doing business now and in the future.



Financial performance analysis of Ontario (Canada) Credit Unions: An application of DEA in the regulatory environment
P Pille, JC Paradi

European Journal of Operational Research - Volume 139, Issue 2, 1 June 2002, Pages 339-350

Models are developed to detect weaknesses in Credit Unions in Ontario, Canada, so that potential financial failures can be predicted. Four data envelopment analysis (DEA) models are presented and compared with the equity to asset ratio, and with the government regulator's extensively modified “Z-score” model. The equity/asset ratio is shown to provide as good a prediction of failure as any of the other models, and is not improved upon by the much more complex Z-score model. The best DEA model provides results comparable to the equity/asset ratio when a slack adjusted efficiency score is used to measure efficiency, particularly for Credit Unions with larger asset sizes. However, DEA also provides indications of where opportunities lie for improvements by weak units by providing specific information, relevant to managers. Hence, for each Credit Union, comparison is made with a peer group of efficient entities that the inefficient institution's management can emulate to improve their performance.

Author Keywords
Data envelopment analysis; Banking; Forecasting; Failure; Efficiency



Combining DEA Window Analysis with the Malmquist Index Approach in a Study of the Canadian Banking Industry
M Asmild, JC Paradi, V Aggarwall, C Schaffnit

Journal of Productivity Analysis - Volume 21, Number 1 / January, 2004

The banking industry in Canada is essentially an oligopoly with five large participants controlling about 90% of the market. To evaluate the industry's performance over time, we need to deal with the problem of a small number of DMU's compared to the number of relevant inputs and outputs. To overcome this problem we use data envelopment analysis (DEA) window analysis, whereby efficiency scores for the 20 year period 1981–2000 are obtained. To measure productivity changes over time, Malmquist indices can be calculated from DEA scores. Using DEA window analysis scores, however, raise the question of how to define the ldquosame period frontierrdquo in a DEA window analysis. We show that for both the adjacent and the base period Malmquist index and for all suggested definitions of same period frontier, the standard decomposition into frontier shift and catching up effects gives inappropriate results when Malmquist indices are based on DEA window analysis scores.

Author Keywords
DEA window analysis - Malmquist index - decomposition - Canadian banking




Using DEA and Worst Practice DEA in Credit Risk Evaluation
JC Paradi, M Asmild, PC Simak

Journal of Productivity Analysis - Volume 21, Number 2 / March, 2004

The purpose of this paper is to introduce the concept of worst practice DEA, which aims at identifying worst performers by placing them on the frontier. This is particularly relevant for our application to credit risk evaluation, but this also has general relevance since the worst performers are where the largest improvement potential can be found. The paper also proposes to use a layering technique instead of the traditional cut-off point approach, since this enables incorporation of risk attitudes and risk-based pricing. Finally, it is shown how the use of a combination of normal and worst practice DEA models enable detection of self-identifiers. The results of the empirical application on credit risk evaluation validate the method. The best combination of layered normal and worst practice DEA models yields an impressive 100% bankruptcy and 78% non-bankruptcy prediction accuracy in the calibration data set, and equally convincing 100% and 67% out-of-sample classification accuracies.

Author Keywords
data envelopment analysis - credit risk - worst practice DEA - layering or peeling technique




Establishing the “practical frontier” in data envelopment analysis
T Sowlati, JC Paradi

Omega - Volume 32, Issue 4, August 2004, Pages 261-272

Data envelopment analysis (DEA) assigns a score to each production unit (decision making unit—DMU) considered in the analysis. Such score indicates whether the unit is efficient or not. For inefficient units, it also identifies a hypothetical unit as the target and thus suggests improvements to their efficiency. However, for efficient units no further improvement can be indicated based on a DEA analysis. Nevertheless, it is important for management to indicate targets for their efficient units if the organization is to improve as a whole. Based on possible variations in the input and output levels of efficient DMUs, new units which are more efficient than DEA efficient units can be created to form a new improved frontier. This paper presents a linear programming model, P-DEA, and a methodology for improving the efficiency of empirically efficient units by defining a new “practical frontier” and utilizing management input. Available bank branch data was used to illustrate the applicability of this theoretical development. The sensitivity of the results to the parameters defined by management in the P-DEA model was also examined, which proved the robustness of the proposed model.

Author Keywords
Data envelopment analysis; Productivity and competitiveness; Linear programming




Commercial branch performance evaluation and results communication in a Canadian bank––a DEA application
JC Paradi, C Schaffnit

European Journal of Operational Research - Volume 156, Issue 3, 1 August 2004, Pages 719-735

In this paper, we focus on evaluating the performance of the commercial branches of a large Canadian bank using data envelopment analysis. Two production models are considered in this country-wide evaluation. One model, looking directly at resource usage, is most useful to the branch manager. The other model, incorporating financial results, is more geared towards senior management. We introduce non-discretionary factors to reflect specific aspects of the environment a branch is operating in, such as risk and economic growth rate of the region. Both input and output multipliers are constrained by incorporating market prices as well as managerial preferences, in order to get effectiveness measures. The cost-minimisation study led to valuable results pertaining to the performance of individual branches. Notable is the methodology introduced here that shows how to present graphical and numeric outcomes to managers. Gap maps, pie charts and target tables are produced for each branch to provide performance goals for the managers. Useful information has also been obtained at the district level. Output oriented models were analysed to reflect the Bank's recent emphasis towards growth in some areas.

Author Keywords
Data envelopment analysis; Management; Banking; Performance improvement; Results presentation




Measuring overall efficiency and effectiveness using DEA
M Asmild, JC Paradi, DN Reese, F Tam

European Journal of Operational Research Volume 178, Issue 1, 1 April 2007, Pages 305-321

This paper presents a framework where data envelopment analysis (DEA) is used to measure overall efficiency and show how to apply this framework to assess effectiveness for more general behavioral goals. The relationships between various cone-ratio DEA models and models to measure overall efficiency are clarified. Specifically it is shown that as multiplier cones tighten, the cone-ratio DEA models converge to measures of overall efficiency. Furthermore, it is argued that multiplier cone and cone-ratio model selection must be consistent with the behavioral goals assigned or assumed for purposes of analysis. Consistent with this reasoning, two new models are introduced to measure effectiveness when value measures are represented by separable or linked cones, where the latter can be used to analyze profit-maximizing effectiveness.

Author Keywords
Data envelopment analysis (DEA); Efficiency; Effectiveness; Cone ratio weight restrictions; Behavioral goals




Intra- and inter-country bank branch assessment using DEA
D McEachern, JC Paradi

Journal of Productivity Analysis - Volume 27, Number 2 / April, 2007

Increasingly globalized financial markets with considerable activity in the multinational sector have created the need to understand inter-country bank branch performance. This topic is relatively unstudied, primarily due to the immense difficulty encountered in gathering reliable data. Fortunately, we have been able to obtain data on a group of banks operating in one geographical market area, but in different countries. In this paper we critically assess bank branch profitability and productivity in seven national branch networks owned and operated by a multi-national financial services corporation. The corporate head office (owner) imposes its management philosophy equally on all of its subsidiaries, thus removing executive managerial and corporate disparity. Results suggest that countries in which branch performance is quite consistent amongst domestic branches are less productive and less profitable when compared to other countries that have more disparity in their efficiency scores. In addition, we discovered that, surprisingly, branches do not have to be productive in order to be profitable and this led us to somewhat of a major breakthrough in inter-country branch analysis. Significant managerial advice may be derived from these results vis-à-vis trans-national benchmarking and opportunity for performance improvements both at the branch level and nationally as well.

DEA - Profitability - Bank branch efficiency - Inter-country benchmarking - Productivity and profitability