How efficient are the Nordic banks? A DEA application for the years 2002-2003

Abstract

In the middle of the 1980s, the Nordic banking industry had experienced significant changes due to the financial deregulation. The oncoming financial crisis was the result of the explosion of bank credit in the beginning of the 1990s, while a large-scale restructuring of the banking system followed. The main purpose of this study is to examine the relative efficiency of the banking industries in four Nordic countries using efficiency measures derived from Data Envelopment Analysis estimation for the years 2002/2003. The final sample consists of 33 commercial and 127 savings banks in the year 2002, while in the year 2003, 3 more units are added. Technical and structural efficiencies are estimated by employing both the production and the intermediation approach. Correlation between profitability ratios and efficiency is also presented. Moreover, the robustness is tested to determine the strength of the results. The empirical results reveal that the Finnish banks are the most efficient institutions while commercial banks are generally more efficient than their savings counterparts. Efficiency is generally higher in 2003 than in 2002. The study also indicates a positive relation between efficiency and profitability.