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Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio

Year 2022, Volume: 22 Issue: 1, 75 - 91, 30.01.2022
https://doi.org/10.21121/eab.1064816

Abstract

Banks constitute approximately 90% of the Turkish financial system, so an efficiently operating banking sector is essential for financial consolidation. To ensure the efficient functioning of the banking production process, capital adequacy ratio (CAR), which is a basic indicator in controlling financial risk, should be managed properly. Additionally, the production process of banks fits into a typical two-stage system, thus opening the black-box on bank efficiency is necessary for an accurate efficiency measurement. By focusing on the link between efficiency, risk and return, this study aims to present a two-stage efficiency evaluation of the commercial banks in Turkey for the year 2018. In addition to the efficiency scores, frontier projections are determined, and an examination is made on the CAR targets. The empirical findings indicate that the inefficiency in the Turkish banking sector mainly stems from the operational performance and the average efficiency score of the state-owned banks is the highest. According to the target values, a pattern is detected between the efficiency scores and CAR. We also conclude that the minimum capital adequacy of 10.5% set by Basel III is not high to guide the commercial banks in Turkey to the efficient frontier.

References

  • Abreu, M., and Mendes, V. (2002). Commercial bank interest margins and profitability: Evidence from E.U. countries. University of Porto Working Paper Series, 122.
  • BRSA. (2010). Sorularla Basel III. Retrieved from https:// www.bddk.org.tr/ContentBddk/dokuman/duyuru_basel_ 0001_53.pdf
  • BRSA. (2018). 2018 annual report. Retrieved from https://www. bddk.org.tr/ContentBddk/dokuman/hakkinda_0013_06. pdf
  • BRSA. (2019). Turkish banking sector main indicators June 2019. Retrieved from https://www.bddk.org.tr/ContentBddk/ dokuman/veri_0023_08.pdf
  • Berger, A. N. (1995). The profit-structure relationship in banking-- tests of market-power and efficient-structure hypotheses. Journal of Money Credit and Banking, 27(2), 404-431.
  • Besanko, D., and Kanatas, G. (1996) The regulation of bank capital: Do capital standards promote bank safety?. Journal of Financial Intermediation, 5(2), 160–183.
  • Bhattacharya, H. (2013). Capital regulation and rising risk of banking industry: A financial accounting perspective. Academy of Banking Studies Journal, 12(1), 31-59.
  • Bhattacharyya, A., Lovell, C. A. K., and Sahay, P. (1997). The impact of liberalization on the productive efficiency of Indian commercial banks. European Journal of Operational Research, 98(2), 332-345.
  • Bialas, M., and Solek, A. (2010). Evolution of capital adequacy ratio. Economics & Sociology, 3(2), 48-57.
  • Bouheni, F. B., and Rachdi, H. (2015). Bank capital adequacy requirements and risk-taking behavior in Tunisia: A simultaneous equations framework. Journal of Applied Business Research, 31(1), 231-238.
  • Buyuksalvarci, A., and Abdioglu, H. (2011). Determinants of capital adequacy ratio in Turkish Banks: A panel data analysis. African Journal of Business Management, 5(27), 11199-11209.
  • Cai, M., and Huang, Z. (2014). Analysis of non performing loan and capital adequacy ratio among Chinese banks in the post-reform period in China. Journal of Advanced Studies in Finance, 5(2), 133-144.
  • Cecchetti, S. G., and Li, L. (2008). Do capital adequacy requirements matter for monetary policy?. Economic Inquiry, 46(4), 643-659.
  • Chen, Y., Cook, W. D., Li, N., and Zhu, J. (2009). Additive efficiency decomposition in two-stage DEA. European Journal of Operational Research, 196(3), 1170-1176.
  • Chen, Y., Cook, W. D., and Zhu, J. (2010). Deriving the DEA frontier for two-stage processes. European Journal of Operational Research, 202(1), 138-142.
  • Dagher, J., Dell’Ariccia, G., Laeven, L., Ratnovski, L., and Tong, H. (2016). Benefits and costs of bank capital. IMF Staff Discussion Note, 16/04. Retrieved from https://www.imf.org/ external/pubs/ft/sdn/2016/sdn1604.pdf
  • Degl’Innocenti, M., Kourtzidis, S. A., Sevic, Z., and Tzeremes, N. G. (2017). Investigating bank efficiency in transition economies: A window-based weight assurance region approach. Economic Modelling, 67, 23-33.
  • Dia, M., Golmohammadi, A., and Takouda, P. M. (2020). Relative efficiency of Canadian banks: A three-stage network bootstrap DEA. Journal of Risk and Financial Management, 13(4), 68.
  • Fukuyama, H., and Matousek, R. (2011). Efficiency of Turkish banking: Two-stage network system. Variable returns to scale model. Journal of International Financial Markets, Institutions and Money, 21(1), 75-91.
  • Fukuyama, H., and Weber, W. L. (2010). A Slacks-based inefficiency measure for a two-stage system with bad outputs. Omega, 38(5), 398-409.
  • Grigorian, D. A., and Manole, V. (2006). Determinants of commercial bank performance in transition: An application of data envelopment analysis. Comparative Economic Studies, 48(3), 497-522.
  • Gual, J. (2011). Capital requirements under Basel III and their impact on the banking industry. Barcelona: La Caixa.
  • Ho, C. T. B., and Oh, K. B. (2008). Measuring online stockbroking performance. Industrial Management & Data Systems, 108(7), 988-1004.
  • Jackson, P. M., and Fethi, M. D. (2000). Evaluating the efficiency of Turkish commercial banks: An application of DEA and Tobit Analysis. In proceedings of the International DEA Symposium, University of Queensland, Brisbane.
  • Kao, C. (2009). Efficiency decomposition in network data envelopment analysis: A relational model. European Journal of Operational Research, 192(3), 949-962.
  • Kao, C., and Hwang, S. N. (2008). Efficiency decomposition in two-stage data envelopment analysis: An application to non-life insurance companies in Taiwan. European Journal of Operational Research, 185(1), 418-429.
  • Kao, C., and Hwang, S. N. (2011). Decomposition of technical and scale efficiencies in two-stage production systems. European Journal of Operational Research, 211(3), 515-519.
  • Karray, S. C., and Chichti, J. E. (2013). Bank size and efficiency in developing countries: Intermediation approach versus value added approach and impact of non-traditional activities. Asian Economic and Financial Review, 3(5), 593-613.
  • KPMG. (2019). Bankacılık Sektörel Bakış. Retrieved from https:// assets.kpmg/content/dam/kpmg/tr/pdf/2019/01/sektorel- bakis-2019-bankacilik.pdf
  • Li, Y., Chen, Y. K., Chien, F. S., Lee, W. C., and Hsu, Y. C. (2016). Study of optimal capital adequacy ratios. Journal of Productivity Analysis, 45(3), 261-274.
  • Liang, L., Cook, W. D., and Zhu, J. (2008). DEA models for twostage processes: Game approach and efficiency decomposition. Naval Research Logistics, 55(7), 643-653.
  • Lim, S., and Zhu, J. (2016). A note on two-stage network DEA model: Frontier projection and duality. European Journal of Operational Research, 248(1), 342-346.
  • Lim, S., and Zhu, J. (2019). Primal-dual correspondence and frontier projections in two-stage network DEA models. Omega, 83, 236-248.
  • Modigliani, F., and Miller M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433-443.
  • Mushtaq, M., Ismail, A., and Hanif, R. (2015). Credit risk, capital adequacy and bank’s performance: An empirical evidence from Pakistan. International Journal of Financial Management, 5(1), 27-32.
  • Nigmonov, A. (2010). Bank performance and efficiency in Uzbekistan. Eurasian Journal of Business and Economics, 3(5), 1-25.
  • Polat, A., and Al-khalaf, H. (2014). What determines capital adequacy in the banking system of Kingdom of Saudi Arabia? A panel data analysis on Tadawul banks. Journal of Applied Finance & Banking, 4(5), 27-43.
  • Posner, E. A. (2015). How do bank regulators determine capital- adequacy requirements?. The University of Chicago Law Review, 82(4), 1853-1895.
  • Reynolds, S. E., Ratanakomut, S., and Gander, J. (2000). Bank financial structure in pre-crisis East and Southeast Asia. Journal of Asian Economics, 11(3), 319–331.
  • Seiford, L. M., and Zhu, J. (1999). Profitability and marketability of the top 55 US commercial banks. Management Science, 45(9), 1270-1288.
  • Sexton, T. R., and Lewis, H. F. (2003). Two-stage DEA: An application to major league baseball. Journal of Productivity Analysis, 19(2-3), 227-249.
  • Sturm, J. E., and Williams, B. (2008). Characteristics determining the efficiency of foreign banks in Australia. Journal of Banking & Finance, 32(11), 2346-2360.
  • Tabari, N. A. Y., Ahmadi, M., and Emami, M. (2013). The effect of liquidity risk on the performance of commercial banks. International Research Journal of Applied and Basic Sciences, 4(6), 1624-1631.
  • The Banks Association of Turkey. (2019). Banks in Turkey 2018. Retrieved from https://www.tbb.org.tr/en/Content/Upload/ Dokuman/161/Banks_in_Turkey_2018.pdf
  • Wang, C. H., Gopal, R. D., and Zionts, S. (1997). Use of data envelopment analysis in assessing information technology impact on firm performance. Annals of Operations Research, 73, 191-213.
  • Wang, K., Huang, W., Wu, J., and Liu, Y. N. (2014). Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA. Omega, 44, 5-20.
  • Wanke, P., and Barros, C. (2014). Two-stage DEA: An application to major Brazilian banks. Expert Systems with Applications, 41(5), 2337-2344.
  • Williams, H. T. (2011). Determinants of capital adequacy in the banking sub-sector of the Nigeria economy: Efficacy of Camels. (A model specification with co-integration analysis). International Journal of Academic Research in Business and Social Sciences, 1(3), 233-248.
  • Zhu, J. (2000). Multi-factor performance measure model with an application to Fortune 500 companies. European Journal of Operational Research, 123(1), 105-124.
Year 2022, Volume: 22 Issue: 1, 75 - 91, 30.01.2022
https://doi.org/10.21121/eab.1064816

Abstract

References

  • Abreu, M., and Mendes, V. (2002). Commercial bank interest margins and profitability: Evidence from E.U. countries. University of Porto Working Paper Series, 122.
  • BRSA. (2010). Sorularla Basel III. Retrieved from https:// www.bddk.org.tr/ContentBddk/dokuman/duyuru_basel_ 0001_53.pdf
  • BRSA. (2018). 2018 annual report. Retrieved from https://www. bddk.org.tr/ContentBddk/dokuman/hakkinda_0013_06. pdf
  • BRSA. (2019). Turkish banking sector main indicators June 2019. Retrieved from https://www.bddk.org.tr/ContentBddk/ dokuman/veri_0023_08.pdf
  • Berger, A. N. (1995). The profit-structure relationship in banking-- tests of market-power and efficient-structure hypotheses. Journal of Money Credit and Banking, 27(2), 404-431.
  • Besanko, D., and Kanatas, G. (1996) The regulation of bank capital: Do capital standards promote bank safety?. Journal of Financial Intermediation, 5(2), 160–183.
  • Bhattacharya, H. (2013). Capital regulation and rising risk of banking industry: A financial accounting perspective. Academy of Banking Studies Journal, 12(1), 31-59.
  • Bhattacharyya, A., Lovell, C. A. K., and Sahay, P. (1997). The impact of liberalization on the productive efficiency of Indian commercial banks. European Journal of Operational Research, 98(2), 332-345.
  • Bialas, M., and Solek, A. (2010). Evolution of capital adequacy ratio. Economics & Sociology, 3(2), 48-57.
  • Bouheni, F. B., and Rachdi, H. (2015). Bank capital adequacy requirements and risk-taking behavior in Tunisia: A simultaneous equations framework. Journal of Applied Business Research, 31(1), 231-238.
  • Buyuksalvarci, A., and Abdioglu, H. (2011). Determinants of capital adequacy ratio in Turkish Banks: A panel data analysis. African Journal of Business Management, 5(27), 11199-11209.
  • Cai, M., and Huang, Z. (2014). Analysis of non performing loan and capital adequacy ratio among Chinese banks in the post-reform period in China. Journal of Advanced Studies in Finance, 5(2), 133-144.
  • Cecchetti, S. G., and Li, L. (2008). Do capital adequacy requirements matter for monetary policy?. Economic Inquiry, 46(4), 643-659.
  • Chen, Y., Cook, W. D., Li, N., and Zhu, J. (2009). Additive efficiency decomposition in two-stage DEA. European Journal of Operational Research, 196(3), 1170-1176.
  • Chen, Y., Cook, W. D., and Zhu, J. (2010). Deriving the DEA frontier for two-stage processes. European Journal of Operational Research, 202(1), 138-142.
  • Dagher, J., Dell’Ariccia, G., Laeven, L., Ratnovski, L., and Tong, H. (2016). Benefits and costs of bank capital. IMF Staff Discussion Note, 16/04. Retrieved from https://www.imf.org/ external/pubs/ft/sdn/2016/sdn1604.pdf
  • Degl’Innocenti, M., Kourtzidis, S. A., Sevic, Z., and Tzeremes, N. G. (2017). Investigating bank efficiency in transition economies: A window-based weight assurance region approach. Economic Modelling, 67, 23-33.
  • Dia, M., Golmohammadi, A., and Takouda, P. M. (2020). Relative efficiency of Canadian banks: A three-stage network bootstrap DEA. Journal of Risk and Financial Management, 13(4), 68.
  • Fukuyama, H., and Matousek, R. (2011). Efficiency of Turkish banking: Two-stage network system. Variable returns to scale model. Journal of International Financial Markets, Institutions and Money, 21(1), 75-91.
  • Fukuyama, H., and Weber, W. L. (2010). A Slacks-based inefficiency measure for a two-stage system with bad outputs. Omega, 38(5), 398-409.
  • Grigorian, D. A., and Manole, V. (2006). Determinants of commercial bank performance in transition: An application of data envelopment analysis. Comparative Economic Studies, 48(3), 497-522.
  • Gual, J. (2011). Capital requirements under Basel III and their impact on the banking industry. Barcelona: La Caixa.
  • Ho, C. T. B., and Oh, K. B. (2008). Measuring online stockbroking performance. Industrial Management & Data Systems, 108(7), 988-1004.
  • Jackson, P. M., and Fethi, M. D. (2000). Evaluating the efficiency of Turkish commercial banks: An application of DEA and Tobit Analysis. In proceedings of the International DEA Symposium, University of Queensland, Brisbane.
  • Kao, C. (2009). Efficiency decomposition in network data envelopment analysis: A relational model. European Journal of Operational Research, 192(3), 949-962.
  • Kao, C., and Hwang, S. N. (2008). Efficiency decomposition in two-stage data envelopment analysis: An application to non-life insurance companies in Taiwan. European Journal of Operational Research, 185(1), 418-429.
  • Kao, C., and Hwang, S. N. (2011). Decomposition of technical and scale efficiencies in two-stage production systems. European Journal of Operational Research, 211(3), 515-519.
  • Karray, S. C., and Chichti, J. E. (2013). Bank size and efficiency in developing countries: Intermediation approach versus value added approach and impact of non-traditional activities. Asian Economic and Financial Review, 3(5), 593-613.
  • KPMG. (2019). Bankacılık Sektörel Bakış. Retrieved from https:// assets.kpmg/content/dam/kpmg/tr/pdf/2019/01/sektorel- bakis-2019-bankacilik.pdf
  • Li, Y., Chen, Y. K., Chien, F. S., Lee, W. C., and Hsu, Y. C. (2016). Study of optimal capital adequacy ratios. Journal of Productivity Analysis, 45(3), 261-274.
  • Liang, L., Cook, W. D., and Zhu, J. (2008). DEA models for twostage processes: Game approach and efficiency decomposition. Naval Research Logistics, 55(7), 643-653.
  • Lim, S., and Zhu, J. (2016). A note on two-stage network DEA model: Frontier projection and duality. European Journal of Operational Research, 248(1), 342-346.
  • Lim, S., and Zhu, J. (2019). Primal-dual correspondence and frontier projections in two-stage network DEA models. Omega, 83, 236-248.
  • Modigliani, F., and Miller M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433-443.
  • Mushtaq, M., Ismail, A., and Hanif, R. (2015). Credit risk, capital adequacy and bank’s performance: An empirical evidence from Pakistan. International Journal of Financial Management, 5(1), 27-32.
  • Nigmonov, A. (2010). Bank performance and efficiency in Uzbekistan. Eurasian Journal of Business and Economics, 3(5), 1-25.
  • Polat, A., and Al-khalaf, H. (2014). What determines capital adequacy in the banking system of Kingdom of Saudi Arabia? A panel data analysis on Tadawul banks. Journal of Applied Finance & Banking, 4(5), 27-43.
  • Posner, E. A. (2015). How do bank regulators determine capital- adequacy requirements?. The University of Chicago Law Review, 82(4), 1853-1895.
  • Reynolds, S. E., Ratanakomut, S., and Gander, J. (2000). Bank financial structure in pre-crisis East and Southeast Asia. Journal of Asian Economics, 11(3), 319–331.
  • Seiford, L. M., and Zhu, J. (1999). Profitability and marketability of the top 55 US commercial banks. Management Science, 45(9), 1270-1288.
  • Sexton, T. R., and Lewis, H. F. (2003). Two-stage DEA: An application to major league baseball. Journal of Productivity Analysis, 19(2-3), 227-249.
  • Sturm, J. E., and Williams, B. (2008). Characteristics determining the efficiency of foreign banks in Australia. Journal of Banking & Finance, 32(11), 2346-2360.
  • Tabari, N. A. Y., Ahmadi, M., and Emami, M. (2013). The effect of liquidity risk on the performance of commercial banks. International Research Journal of Applied and Basic Sciences, 4(6), 1624-1631.
  • The Banks Association of Turkey. (2019). Banks in Turkey 2018. Retrieved from https://www.tbb.org.tr/en/Content/Upload/ Dokuman/161/Banks_in_Turkey_2018.pdf
  • Wang, C. H., Gopal, R. D., and Zionts, S. (1997). Use of data envelopment analysis in assessing information technology impact on firm performance. Annals of Operations Research, 73, 191-213.
  • Wang, K., Huang, W., Wu, J., and Liu, Y. N. (2014). Efficiency measures of the Chinese commercial banking system using an additive two-stage DEA. Omega, 44, 5-20.
  • Wanke, P., and Barros, C. (2014). Two-stage DEA: An application to major Brazilian banks. Expert Systems with Applications, 41(5), 2337-2344.
  • Williams, H. T. (2011). Determinants of capital adequacy in the banking sub-sector of the Nigeria economy: Efficacy of Camels. (A model specification with co-integration analysis). International Journal of Academic Research in Business and Social Sciences, 1(3), 233-248.
  • Zhu, J. (2000). Multi-factor performance measure model with an application to Fortune 500 companies. European Journal of Operational Research, 123(1), 105-124.
There are 49 citations in total.

Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Emine Ebru Akın Aksoy This is me 0000-0001-7205-0283

Ceren Dirik 0000-0001-6762-8933

İlkut Elif Kandil Göker 0000-0002-5290-3514

Publication Date January 30, 2022
Acceptance Date December 10, 2021
Published in Issue Year 2022 Volume: 22 Issue: 1

Cite

APA Akın Aksoy, E. E., Dirik, C., & Kandil Göker, İ. E. (2022). Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio. Ege Academic Review, 22(1), 75-91. https://doi.org/10.21121/eab.1064816
AMA Akın Aksoy EE, Dirik C, Kandil Göker İE. Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio. ear. January 2022;22(1):75-91. doi:10.21121/eab.1064816
Chicago Akın Aksoy, Emine Ebru, Ceren Dirik, and İlkut Elif Kandil Göker. “Opening the Black-Box of Bank Efficiency in Turkey With Two-Stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio”. Ege Academic Review 22, no. 1 (January 2022): 75-91. https://doi.org/10.21121/eab.1064816.
EndNote Akın Aksoy EE, Dirik C, Kandil Göker İE (January 1, 2022) Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio. Ege Academic Review 22 1 75–91.
IEEE E. E. Akın Aksoy, C. Dirik, and İ. E. Kandil Göker, “Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio”, ear, vol. 22, no. 1, pp. 75–91, 2022, doi: 10.21121/eab.1064816.
ISNAD Akın Aksoy, Emine Ebru et al. “Opening the Black-Box of Bank Efficiency in Turkey With Two-Stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio”. Ege Academic Review 22/1 (January 2022), 75-91. https://doi.org/10.21121/eab.1064816.
JAMA Akın Aksoy EE, Dirik C, Kandil Göker İE. Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio. ear. 2022;22:75–91.
MLA Akın Aksoy, Emine Ebru et al. “Opening the Black-Box of Bank Efficiency in Turkey With Two-Stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio”. Ege Academic Review, vol. 22, no. 1, 2022, pp. 75-91, doi:10.21121/eab.1064816.
Vancouver Akın Aksoy EE, Dirik C, Kandil Göker İE. Opening the Black-box of Bank Efficiency in Turkey with Two-stage Data Envelopment Analysis: A Study on Capital Adequacy Ratio. ear. 2022;22(1):75-91.