A multidimensional approach to measuring bank branch efficiency

Bank branch efficiency measurements range from simple ratio and standard regression analyses to more complex frontier approaches, each with specific strengths and weaknesses. However, in isolation, the in- dexes that these approaches generate fail to capture the multidimensional nature of bank branch effi- ciency. This paper develops a three-step procedure that enables combining the strengths of the existing approaches. We begin by taking the widest number of efficiency indexes proposed in literature (step 1), reduce the redundant information through a collinearity analysis (step 2), and categorize bank branches into efficiency classes through a clustering procedure (step 3). We test our approach on 23 branches of an Italian regional bank. The results show that this three-step approach is able to provide a multidimensional view of effi- ciency based on indexes employing a wide range of theoretical and methodological approaches with different ways of conceiving (intermediation vs. production) and measuring (stock, vs. flow, or physi- cal measures) bank outputs and inputs, different definitions of efficiency (technical and cost efficiency), and different measurement approaches (ratios, standard regression analysis and frontier functions). The resulting efficiency ranking is consistent with those that univariate indexes generate and provides a bal- anced evaluation of branch efficiency when such indexes produce contradictory indications.