An Analysis of Measuring & Explaining the Efficiency for Korean Savings Banks by Using Network DEA

This paper tries to measure the (in)efficiency for savings banks in Korea, which created the recent savings and loans crisis, and explain the determinants of the measured efficiencies. Unlike the previous papers estimating overall efficiency, this study employs a network DEA (Data Envelopment Analysis) and conducts the two-stages, (1) ‘establishing’ funds stage and (2) ‘operating’ funds stage. The notable findings from our empirical study are: First, we have not been able to generalize the relationship of total assets, the size of the banks with efficiency when we divide the efficiencies into the ‘establishing’ and ‘operating’ funds stages. Second, we may support the results that the higher soundness creates the higher efficiency only in ‘operating’ funds stage and ‘overall’ efficiency. Third, AFBD variable, which represents the allowance for bad debts including the amount of insolvent project financing, seems to be strongly (negatively) significant only in ‘operating’ funds stage, as we expected. This conclusion is only possible to be drawn by the multi-stages analysis that this paper employed. Fourth, we are not also able to conclude that the loans to the household has a positive effect on both ‘establishing’ and ‘operating’ funds stage. The loan-deposit ratio also shows the structure of funding and loans, and it has a positive effect on efficiency only in the ‘operating’ funds stage. (5) It appears that more diversified income sources have a strong and positive relationship in overall efficiency equation. However, when we break the efficiency into two categories the relationship is not so clear. This paper provides a financial policy for enhancing efficiency levels in both the ‘establishing’ funds and ‘operating’ funds stages to the Korean savings banking system.