Financial performance analysis of Ontario (Canada) credit unions: An application of data envelopment analysis in the regulatory environment

Models are developed to detect weaknesses in Credit Unions in Ontario, Canada, so that potential financial failures can be predicted. Four data envelopment analysis (DEA) models are presented and compared with the equity to asset ratio, and with the government regulator's extensively modified ‘Z-score’ model. The equity/asset ratio is shown to provide as good a prediction of failure as any of the other models, and is not improved upon by the much more complex Z-score model. The best DEA model provides results comparable to the equity/asset ratio when a slack adjusted efficiency score is used to measure efficiency, particularly for Credit Unions with larger asset sizes. However, DEA also provides indications of where opportunities lie for improvements by weak units by providing specific information, relevant to managers. Hence, for each Credit Union, comparison is made with a peer group of efficient entities that the inefficient institution's management can emulate to improve their performance.