Problem Set 1 [Benchmarking: inter - organizational comparisons] The Problem Sets 1 and 2 are based on the article
Grifell-Tatjé, E. and C.A.K Lovell (1996), “Deregulation and Productivity Decline: The Case of the Spanish Savings Banks,” European Economic Review 40, 1281-1303.
Motivation
The data in the Excel file is a real one and belongs to the Spanish savings banks in the period 1986 - 1991. Spain signed the accession to the European Union (EU) in June 1985 and it was effective since 1986. Therefore, we are analyzing the banking sector in the first years after Spain's entry into the EU. For the entry, the EU required the liberation of the financial sector, which had traditionally been heavily regulated. This requirement particularly affected the Spanish savings banks which were not allowed to offer their services outside their own geographical region. Savings banks concentrated on retail banking, providing checking, savings and loan services to individuals. They did little commercial business, and they conducted very few foreign exchange transactions, these activities being heavily concentrated in the private banking sector. By 1987, however, all interest rates and service charges were freed, and in 1989 savings banks finally were allowed to branch outside their geographic region. Additionally, investment requirements were gradually phased out during l989-1992. The l986-1991 period can be characterized as one in which the rules of the game changed quite dramatically in the Spanish banking sector. While a constantly changing environment caused operating problems for savings bank managements, it also created opportunities for growth. Particularly since 1989 two features have dominated the savings bank segment of the industry: rapid branching, much of it interregional, and consolidation through mergers and acquisitions.
Purpose
The main objective of this problem set, and the following one, is to analyze the impact on savings banks of Spain’s entry into the EU. To do this, these problem sets apply techniques of benchmark. The Problem Set 1 is based on inter - organizational comparisons and the Problem Set 2 on longitudinal – dynamic comparison. This problem set 1 asks about technical efficiency, super-efficiency and layers classification of savings banks. Problem set 2 reproduces the main aspects of the article “Deregulation and Productivity Decline: The Case of the Spanish Savings Banks,” which are based on longitudinal benchmark.
The variables: Outputs and Inputs
In the banking literature there is a lack of agreement in defining what a bank produces. A possibility is the value added approach. In this approach deposits are included among the outputs because they produce a very important share of bank value added. The outputs and inputs have been defined following this approach. The main reason for this preference is that input consumption has a closer relationship with the number of loans and deposits than with their value. We have adopted this point of view, but we do not have enough information to define all the inputs in terms of their quantities. Therefore, for two inputs we use their value. In these cases, these values must be deflated to a base period.
 
The data set defines three outputs and three inputs. The three basic outputs are: the number of loan accounts (OUT1), the number of checking accounts (OUT2), and the number of savings accounts (OUT3). We have defined three inputs: the number of employees (INP1), expenditure on materials (INP2), and direct expenditure on buildings plus accounting depreciation (INP3). The expenditures on materials and buildings have been deflated to 1986 prices, using the consumer price index.
As a direct consequence of the mergers and acquisitions, the number of savings banks in operation decreased sharply during this period, from 77 in 1986 to 56 in 1991. Some of these mergers involved more than two savings banks. Over the entire period there have occurred 15 mergers and acquisitions, 14 of them taking place in the years 1990 and 1991. The sample is the population in the years 1986, 1989 and 1991 and almost it in the years 1987 (76 out of 77), 1988 (75 out of 77) and 1990 (59 out of 64).
Questions:
Note: Questions are based on the assumption of a technology with constant returns to scale and output oriented technical efficiency.
1.- Calculate the output-oriented technical efficiency of these years (from 1986 to 1991) assuming constant returns to scale (CRS) and defining a contemporaneous technology, which the article calls “adjacent periods”.
2.- Identify the observations that are output-oriented technically efficient. List them. Is it possible to identify a group of always efficient savings banks?
3.- Reproduce the Table 3, on page 1292, of the article “Deregulation and Productivity Decline: The Case of the Spanish Savings Banks.”
4.- Rank the efficient savings banks from the best to the worst efficient for the years from 1986 to 1991. Is this ranking stable over time? Is it possible to identify one (or more) excellent savings bank(s) based on this super-efficiency ranking?
5.- We can also make a classification of the savings banks based on layers. How many layers can we define for each of the years? Is the number of layers the same?
6.- Now, pay attention to the observations. Are they in the same layer over time? Are they jumping? or Are they jumping erratically? Can we identify a pattern in any of them (ascending, descending, stable,..,)?