Estimating two‐stage network Slacks‐based inefficiency: An application to Bangladesh banking

This paper studies the performance of nineteen private commercial banks and two government‐owned banks in Bangladesh during the period 2005–2008 using a slacks‐based inefficiency measure and the directional technology distance function. Performance is measured assuming a black‐box production structure and then the black‐box is opened and examined using a two stage network production structure. Current period performance in maximizing desirable loans and securities investments and minimizing bad loans depends on how efficiently inputs at one stage of production are transformed into intermediate outputs which are used at a subsequent stage of production. In addition, current period production of the intermediate output is constrained by the amount of non‐performing loans that were generated in an earlier period.