Two-stage DEA: An application to major Brazilian banks

• In this paper, efficiency in Brazilian banking is measured using a two-stage process.
• Results indicate that Brazilian banks are heterogeneous.
• Cost efficiency is explained by M&A and size.
• Productive efficiency is explained M&A and public status.
• Policy implications for the Brazilian banking sector are also derived.

Although banking has been widely studied using standard DEA (Data Envelopment Analysis) models and its variations, these models do not in fact account for the internal structure relative to measures characterizing banking operations performance. In this paper, efficiency in Brazilian banking is measured using a two-stage process. In the first stage, called cost efficiency, number of branches and employees are used to attain a certain level of administrative and personnel expenses per year. In the second stage, called productive efficiency, these expenses allow the consecution of two important net outputs: equity and permanent assets. The network-DEA centralized efficiency model is adopted here to optimize both stages simultaneously. Results indicate that Brazilian banks are heterogeneous, with some focusing on cost efficiency and others on productive efficiency. Furthermore, cost efficiency is explained by M&A and size, while productive efficiency is explained by M&A and public status. Policy implications for the Brazilian banking sector are also derived.