Efficiency and productivity of the Brazilian banks: A new approach based on two-stage network DEA

Abstract

This article creates a conceptual model, called a network system, to represent the Brazilian banking production system, based on its internal operational processes. The first, called the intermediation process, measures a bank's efficiency in extending loans from its available resources. The second, called the revenue process, measures a bank's efficiency in earning profit, mainly from loans granted. We adopt a two-stage DEA model. In the first stage, a relational network DEA model measures both the network system efficiency scores and internal processes. This technique, associated with the Malmquist Index, assesses performance changes over time. In the second stage, these efficiency scores are considered dependent variables, such that Tobit models can determine how the Brazilian credit market's characteristics can explain the network system and internal processes' efficiency. Results show not only a growing trend toward greater efficiency in the revenue process, but also an increase in productivity accompanied by a decline in the intermediation process technology. Given the high banking spreads in Brazil, these results indicate deterioration in the quality of the credit portfolio and the prospect of future insolvency. We discuss implications of this scenario for domestic banks and collateral policy.