DATA TRANSFORMATIONS IN DEA CONE RATIO ENVELOPMENT APPROACHES FOR MONITORING BANK PERFORMANCES

Cone ratio DEA (Data Envelopment Analysis) models are suggested for mo nitoring and/or early warning systems to be used by bank regulatory ag encies. Illustrative examples are developed from data on 1984 and 1985 performances of the 16 largest banks in Texas. Five large non-Texas b anks are introduced as ''excellent performers'' to help evaluate these Texas banks in terms of their ''risk coverage'' as well as ''efficien cy''. Cone ratio envelopments are used to transform original data in o rder to reflect performances by the non-Texas banks with respect to '' risk coverage'' as well as ''efficiency''. Formulas for transforming t o and from the original data are supplied with accompanying explanatio ns and interpretations which include comparisons with the ''risk-adjus ted capital'' and ''risk-coverage'' allowances formulas that have been adopted recently by U.S. Government (and other) regulators in banking (and insurance) in conformance with the ''Basel Agreement'' of 1988. (C) 1997 Elsevier Science B.V.