THE USE OF DEA TO ASSESS THE FINANCIAL EFFICIENCY OF LARGE U.S. BANKS

Data envelopment analysis (DEA) was used to analyze the input/output efficiency of large U.S. banks in 1987 and 1999. The former was the year that banks belatedly began to acknowledge financially the increasingly severe problems with their loans to less-developed countries, especially in Latin America. For 1987 it was found that the DEA identified efficient ("best practice") banks were in fact financial "bad practice" banks. DEA efficient banks were less profitable in all dimensions than the identified inefficient banks. Loans to foreign borrowers had become such a pervasive output that they became identified as a positive, necessary component of input/output efficiency. By 1992, DEA identified "best practice" banks were financial "good practice" banks as well. DEA efficient banks were more profitable in all dimensions than the identified inefficient banks.