DEA/AR efficiency and profitability of Mexican banks - A total income model

Data envelopment analysis (DEA) and linked-cone assurance region (LC-AR) models are used in this paper to investigate the efficiency and profitability potential of Mexican banks as they engage in activities that incur interest and non-interest expenses and produce income. DEA provides a measure of each bank's relation to the best-practice frontier for its competitors. This can provide a better quality-benchmark than using industry averages or a particular peer bank as the benchmark. The banks are classified into efficient and inefficient sets. Multiplier values for AR-inefficient banks with unique slacks indicate the potential for management to improve the bank's performance relative to its peers. LC-ARs that provide economically reasonable bounds for the multipliers lead to profitability potential, as distinct from efficiency, results. (C) 1997 Elsevier Science B.V.