DEA Efficiency Profiles of U.S. Banks Operating Internationally

The contradiction in 1987 between identified efficient banks and their low profitability performance was due to the methodology. Because of the pervasiveness of LDC loans, the empirically-based DEA recognized this overriding emphasis as 'best practice.' What led to this, of course, was something akin to herd behavior - where one bank after another had entered the LDC loan market in a significant way. As discussed above, DEA’s best practice production frontier was estimated from the observed inputs/outputs of the sample banks. The inputs/outputs of identified efficient banks defined the efficient frontier and enveloped those of inefficient banks. That is, in 1987, DEA identified the LDC herd mentality as a positive contributor to bank efficiency and defined the efficient frontier based on the inputs/outputs of these problem-loan banks.As noted above in Table 4, this problem was clearly recognized by the low profitability performance of the 1987 efficient banks. These DEA-identified best practice banks were in fact financial 'bad practice' banks. Again, this contradiction was apparent from the huge LDC loan write offs. In general, a DEA problem of this type can be identified by measuring DMU performance to validate results and by knowledge of the managerial/institutional characteristics of the DMUs and the exogenous factors impacting them. In this way, DEA results can be adjusted as needed to provide the correct interpretation of DMU efficiency.By 1992, banking had normalized and DEA-identified best practice banks were also financial good practice banks. These results were consistent with the endogenous and exogenous aspects of banking at that time. Efficient banks had higher returns on all six profitability measures than inefficient banks, and all of their returns were positive. Also, their returns on foreign activities were higher than on domestic activities.On the other hand, inefficient banks had positive returns on five of six measures, excluding consolidated net income to total equity capital. Also, their returns on foreign activities were higher than on domestic activities. Thus, in 1992 both efficient and inefficient banks had positive returns on foreign activities, although they were higher for efficient banks. The fact that efficient banks had higher returns on all measures was, with one exception, a complete reversal from 1987.In conclusion, the prescription for the improved input/output efficiency of banks may be summarized as follows: Management should always focus on overall efficiency, but with particular attention to input variables - especially cash and real capital - and to foreign loans among the outputs. Further, when efficiency is in a state of flux, for better or worse, management should be alert to both foreign loan outputs and cash inputs.