Measuring Japanese bank performance: a dynamic network DEA approach

A dynamic two-stage network model of production incorporating financial regulatory constraints is developed and estimated for Japanese commercial banks. In the first stage of production bank managers use three desirable inputs (labor, physical capital, and equity capital) to produce two intermediate outputs-deposits and other raised funds. The first stage is constrained by the level of non-performing loans produced in a preceding period. In the second stage, the bank managers use the first stage intermediate outputs to produce desirable outputs of loans and securities investments and an undesirable output of non-performing loans. The dynamic framework allows resources to be allocated over time to maximize the production of desirable outputs and simultaneously minimize the production of undesirable outputs.