BANK EFFICIENCY: at at given level of investment or initial cost, how much more can a bank make in profit?

MEASUREMENT: There have been several approaches to efficiency measurement of banks. Berger and Humphrey reviewed three approaches: asset approach, user cost approach, and value added approach. See article attached. While Kablan looks at frontier analysis. See attached. Perhaps a more practical approach may be focusing on the banks's financial statement and determine 3 measurements: (i) degree of operating leverage; (ii) degree of financial leverage; and combined leverage.

(1)   DOL = (^OP / OP) / (^Q / Q)

... where ^OP = change in operating profit; OP = operating profit in previous period (before interest and taxes); ^Q = change in sales volume and Q = sales volume in the previous period. This measure measures the ratio of % change in operating profit over % change in sales volume. At any given sales volume Q, if the profit is higher in comparison to peers int he industry or self in prior period, then it can be said the firm (bank) is "efficient."

A second measure taking the information from the bank's income statement is the degree of financial leverage:

(2)   DFL = (^OP / OP) / (^OPBT / OPBT)

... where ^OP = change in operating profit before interest and tax; OP = operating profits in previous period (before interest and taxes); ^ OPBT = change in operating profit before taxes (after interest); OPBT = operating profit before taxes (after interest). DFL measures % change in operating profits before interest and tax over % change in operating profit before tax---it tells us how efficient the bank is managing in making more profit; if it does well, it is efficient.

This proposed efficiency measurement should be seen through per share level--- in case investors are asking whether the bank is operating efficiency in using money to make more money. This measurement may be obtained through the combined leverage:

(3)   DCL = DOL(DFL)

This accounting approach by looking at the financial statement of the bank is less complicated and less theoretical. There is no need to interview bank officers or management. The numbers speak for their management performance.

SUSTAINABILITY: Unless you are studying banks in the US or other western countries where bank failure may be common events, in developing and underdeveloped countries banks are highly regulated. Heighten regulation, albeit not conducive to business creativity, serves as a preventive measure against bank failure, i.e. higher reserved requirement, regulated transactions, etc. Thus, banks in more tightly regulated economies, such as India or China generally sees little incidence of failure---there seems to be a built-in "sustainability"---if sustainability means continuous operations.

SUSTAINED PROFITABLE OPERATIONS: if sustainability is defined differently to mean sustained profitability year-after-year, then we might look at the growth rate of the operations leverage and degree of financial leverage of the bank. See above.

I suggest using Data envelopment analysis and from DEA is very suitable SBM model(Slack based model). We published article about Slovak banking sector effectivity using DEA under intermediation approach. It can be found here:

https://is.muni.cz/do/econ/sborniky/2014/proceedings-EFS-2014.pdf

pp. 64-72

If you want to research oparational efficiency, you just select appropriate operational inputs and output data and compute some DEA model.

Have a nice day

The standard econometric frontier approach would be a good starting point. You have to specify the element of operating efficiency- scale or scope- that you are investigating

See a broad point of view from Zenios.

http://fic.wharton.upenn.edu/fic/papers/97/zenios.pdf

I used Data Envelopment Analysis (DEA) to measure different technical and scale efficiencies in six of Arab banking industries.  Therefore, may I request you to read my article "An Examination of Technical, Pure Technical, and Scale Efficiencies in GCC Banking". I hope that the article will be of interest to your research and would answer your question.

The operational efficiency of banks can be vastly improved with the new banking system designed and developed by Varma. The text document and working modules are posted on Researchgate. Study the text document and portable savings account modules which are aimed at improving efficiency, performance and services of banks to the ultimate level.

Article Liberalize the banking sector

https://www.researchgate.net/publication/305815587_The_Dhaka_Mercantile_Co-operative_Bank_Limited_A_Case_of_Islamic_Shari%27ah_Banking_in_Bangladesh

Article The Dhaka Mercantile Co-operative Bank Limited: A Case of Is...

Hi,

You may have a look to this paper:

Liquidity creation, regulatory capital, and bank profitability

International Review of Financial Analysis, December 2016, Pages 98-109

Vuong Thao Tran, Chien-Ting Lin, Hoa Nguyen

Best regards