Change in the composition of bank income and its effect on the changes in the efficiency of bank regions

09 September 2014

Over the past five years, banks experienced a change in the composition of bank income earning more in service fees compared to interest income. The effect of this change on the efficiency of bank regions is investigated. Data Envelopment Analysis (DEA) and the TFP (Total Factor Productivity) index decomposition methodology were used to estimate efficiency and to decompose productivity change into its different components. Two models were specified – one for the ‘traditional function’ of a bank and one for the ‘non-traditional function’ of a bank. It appears that some bank regions experienced improvement in efficiency under the “non-traditional” model, meaning that the change in the composition of bank income can result in improved efficiency.