Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis
We propose a method for bank efficiency assessment, based on weight restricted DEA, that limits banks’ abilities to use extreme weights, corresponding to extreme judgements of the risk adjusted prices on funding sources and assets. Based on a data set comprising the largest European banks during the...
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| Format: | Article |
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Elsevier
2016
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| Online Access: | https://eprints.nottingham.ac.uk/37513/ |
| _version_ | 1848795475301367808 |
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| author | Asmild, Mette Zhu, Minyan |
| author_facet | Asmild, Mette Zhu, Minyan |
| author_sort | Asmild, Mette |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | We propose a method for bank efficiency assessment, based on weight restricted DEA, that limits banks’ abilities to use extreme weights, corresponding to extreme judgements of the risk adjusted prices on funding sources and assets. Based on a data set comprising the largest European banks during the financial crisis, we illustrate the impact of the proposed weight restrictions in two different efficiency models; one related to banks’ funding mix and one related to their asset mix. The results show that using a more balanced set of weights tend to reduce the estimated efficiency scores more for those banks which were bailed out during the crisis, which confirms the potential bias within standard DEA that does not control for extreme weights applied by highly risky banks. We discuss the use of the proposed method as a regulatory tool to constrain discretion when complying with regulatory capital benchmarks such as the Basel regulatory capital ratios. |
| first_indexed | 2025-11-14T19:32:41Z |
| format | Article |
| id | nottingham-37513 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:32:41Z |
| publishDate | 2016 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-375132020-05-04T17:56:15Z https://eprints.nottingham.ac.uk/37513/ Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis Asmild, Mette Zhu, Minyan We propose a method for bank efficiency assessment, based on weight restricted DEA, that limits banks’ abilities to use extreme weights, corresponding to extreme judgements of the risk adjusted prices on funding sources and assets. Based on a data set comprising the largest European banks during the financial crisis, we illustrate the impact of the proposed weight restrictions in two different efficiency models; one related to banks’ funding mix and one related to their asset mix. The results show that using a more balanced set of weights tend to reduce the estimated efficiency scores more for those banks which were bailed out during the crisis, which confirms the potential bias within standard DEA that does not control for extreme weights applied by highly risky banks. We discuss the use of the proposed method as a regulatory tool to constrain discretion when complying with regulatory capital benchmarks such as the Basel regulatory capital ratios. Elsevier 2016-06-16 Article PeerReviewed Asmild, Mette and Zhu, Minyan (2016) Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis. European Journal of Operational Research, 251 (3). pp. 999-1015. ISSN 0377-2217 Data Envelopment Analysis (DEA) Weight restrictions Banking Effi¬ciency risk Financial crisis Regulation benchmarks http://www.sciencedirect.com/science/article/pii/S0377221715011455 doi:10.1016/j.ejor.2015.12.021 doi:10.1016/j.ejor.2015.12.021 |
| spellingShingle | Data Envelopment Analysis (DEA) Weight restrictions Banking Effi¬ciency risk Financial crisis Regulation benchmarks Asmild, Mette Zhu, Minyan Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title | Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title_full | Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title_fullStr | Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title_full_unstemmed | Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title_short | Controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| title_sort | controlling for the use of extreme weights in bank efficiency assessments during the financial crisis |
| topic | Data Envelopment Analysis (DEA) Weight restrictions Banking Effi¬ciency risk Financial crisis Regulation benchmarks |
| url | https://eprints.nottingham.ac.uk/37513/ https://eprints.nottingham.ac.uk/37513/ https://eprints.nottingham.ac.uk/37513/ |