Measuring efficiency of commercial banks and other deposit institutions: DEA-Malmquist approach

Abstract

Research background: Commercial banks play a vital role in the global financial system and are critical components of it. Hence, the efficient performance of commercial banks could lead to more robust economic stability, enhanced financial resilience, and sustainable growth. The pandemic/post-pandemic period forces the expansion of digitalisation in the economy, including the banking sector. The Malmquist Index helps to assess productivity change. This research fills the gap in measuring the dynamics of efficiency and productivity change during the pandemic/post-pandemic period in a small open economy.

Purpose of the article: The current study aims to assess and compare the dynamics of banking sector efficiency and productivity change in the pandemic/post-pandemic period.

Methods: Data Envelopment Analysis (DEA) was used in the current research in order to measure the efficiency of deposit institutions operating in Lithuania. The study employed the input-oriented Constant Returns to Scale (CRS) model in order to assess how efficiently the banks utilise the inputs to achieve the outputs. The calculations of the efficiency scores were complemented using the Malmquist Index, which evaluates the productivity change over time using Total Factor Productivity Change (TFPCH), Technical Efficiency Change (TECH), and Technological Change (TCCH).

Findings & value added: To the best of the authors’ knowledge, this is the first study to explore the banks’ efficiency and productivity change using DEA and MI for the Lithuanian banking sector. The research results have revealed varying efficiency among the Lithuanian commercial banks and other deposit institutions within the four investigated models. Depending on the model, some studied deposit institutions reached the highest scores, while others showed lower efficiency. However, the results of the Malmquist Index have showed overall productivity growth across all the models, underlining positive technological advancements despite challenges like the COVID-19 pandemic, i.e. the productivity change showed a positive dynamic over the analysed period. The present research provides valuable insights and contributes to efficiency-related knowledge, highlighting trends in productivity for strategic decision-making and policy formulation based on the case of deposit institutions operating in Lithuania. The results are valuable and could be practically implied by other EU banks operating in small open economies by adopting the practices of the banks that were considered efficient and showed positive productivity change. In other words, high-performing Lithuanian banks could be treated as a benchmark and set as a model for less efficient banks operating in other EU countries.

Keywords

bank efficiency, commercial banks, data envelopment analysis (DEA), Malmquist Index (MI), Lithuania

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