Measuring financial intermediation

Title Alternative:a model and application to the Slovak banking sector
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Technická Univerzita v Liberci
Technical university of Liberec, Czech Republic
The paper proposes a model for measuring the attainment in financial intermediation that answers to situations when functions of financial intermediaries from a macroeconomic viewpoint may be primarily reduced to taking deposits and providing loans (which is characteristic of financial sectors of Post-Communist economies or economies with underdeveloped financial markets). The model builds on the methodology of Data Envelopment Analysis [DEA] since it estimates the production possibility set in a traditional manner as a conical or convex hull of observed production activities. Unlike DEA, the model seeks simultaneously to deflate only deposits and inflate loans to a greatest extent possible so that the production activity of a financial intermediary (typically a bank) remains feasible and stays in the estimated production possibility set. The model translates the identified slacks in deposits and loans into a metric that measures by which factor it is feasible to increase multiplicatively the actually observed loan-to-deposit ratio of a financial intermediary. The metric is computable for individual banks on a yearly basis, but is equally aggregable for a bank over the entire period. In contrast to traditional usage of DEA for efficiency measurement, the proposed model is associated more with the notion of productivity in financial intermediation rather than with the concept of efficiency. The model is presented and demonstrated in a case study of Slovak commercial banks for the period from 2008 to 2016. It is found that only smaller organizational units (smaller banks and branch offices of foreign banks) were in the past few years capable of financial intermediation at the best utilization of their resources, which is an observation relevant from a regulatory point of view.
financial intermediation, loan-to-deposit ratio, data envelopment analysis, Slovak commercial banks