A comprehensive framework of classifying management science/operation research techniques' applications in banking.

Author:Rana, Dharam S.
Position:Report
 
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  1. INTRODUCTION

    Zanakis, Mavrides, and Roussakis (1986) published an article on Management Science in banking. At that time, bankers were experiencing significant competitive pressures due to the deregulation of institutional proceeds (Zanakis et al., 1986:114). Managers seeking sustainable competitive advantage considered the adoption of Management Science and Operations Research applications in banking as an effective strategy. Management Science allows decision makers to model real-life situations, evaluate different alternatives, and determine the best course of action under the model's assumptions. Management Science is used as an aid to improve results and organizational performance. (Zanakis et al., 1986:114).

    Based upon their organizational assessment, Zanakis et al. (1986) suggested that Decision Support Systems (DSS) and Management Information Systems (MIS) together with technological advances would help managers solve problems. They cited several examples of how banks had MS groups regularly implement projects. It seems advantageous to prove the merit in this prediction and ascertain which technological advances using MS techniques are now becoming popular.

    The study of Zanakis et al. (1986) was inspired by a comprehensive investigation into the use of MS in the banking industry done by Cohen, Maier and Vander Weide (1981). Cohen et al. (1981) identified pertinent banking application areas and evaluated the prevalent MS techniques employed in those areas. Inspired by this research, Zanakis et al. (1986) created a two-way classification scheme. Decision-makers in the banking industry may seek to revisit MS strategies of the past to achieve substantive performance gains. Since the study of Zanakis et al. (1986), a large variety of MS applications in banking has been developed. Also, trends in MS applications utilization may have changed. Revisiting their study will provide useful additional information to the body of knowledge and implications for practitioners and bank managers. A review of the literature did not reveal any study that provides a comprehensive review of classifying applications of MS/OR techniques in banking covering the time period from 1989 to 2009. Our research attempts to address this gap in the literature.

    Over the past 20 years, MS researchers were surprisingly inattentive in the areas of arbitrage and currency exchange. More research is still needed in the international arena. However, a recent study by Berger, Dai, Ongena and Smith (2003) suggests the future of bank globalization will be limited since firms frequently use host nation banks for cash management services. Finally, the diminished separation between banking and the securities underwriting business should spark a whole new round of conversation among banking scholars (DeFarrari and Palmer, 2001).

  2. METHODOLOGY

    Following Zanakis et al. (1986) who analyzed and classified 164 journal articles on MS in banking, we used a two-way scheme to analyze and classify new research articles published on the topic in order to gain insights into the current and future trends in banking. The study of Zanakis et al. (1986) was limited in scope. Since 1986, a large variety of applications of MS in banking has been developed and is now being utilized.

    Our study covers the time period from 1989 to 2009 and has identified 258 articles dealing with MS techniques' applications in banking. Like Zanakis et al. (1986), theoretical articles of general interest to business or non-banking financial institutions are omitted. Only published journal articles are considered in this study. Books, unpublished reports, and conference proceedings are excluded as it was done by Zanakis et al. (1986) to have the same type of pieces of academic knowledge and to maintain the consistency with the previous research.

    The economy in the United States has undergone two recessions for the last 10 years. The financial crisis from 2007 to 2010 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s that has adversely affected the banking industry. This study assesses historical trends of Management Science applications in the banking industry by identifying and categorizing published literature on the topic of utilization of Management Science techniques in banking for the last twenty-one years. The banking literature is categorized using the two-way classification scheme created by Zanakis et al. (1986). The primary collection sources of the articles we analyzed were academic journals and electronic databases (i.e. EbscoHost, ProQuest, ScienceDirect, Dissertation Abstracts International database, etc.). It is the intention of this research to create a comprehensive, though not exhaustive classification of the use of Management Science applications in banking.

  3. RESULTS AND DISCUSSION

    In the earlier study by Zanakis et al. (1986), Management Science/Operations Research was used most frequently in the banking application areas of financial management, portfolio management, customer credit scoring, and check operations. The most frequently used techniques were statistical analysis, linear programming, forecasting and simulation. More research was needed in productivity/profitability operations and international activities (arbitrage and currency swaps). Although some findings are similar to those of Zanakis et al. (1986), this research provides a more comprehensive review of MS/OR applications in banking operations. The study also gives an insight into current and future trends in the banking industry.

    First, data compilation shows compelling evidence that banking priorities have shifted from corporate planning for financial/liquidity management to bank operations (e.g. check processing profitability, productivity, computerizing bank operations). Second, technological advances brought forth sophisticated information systems to aid bankers in daily banking operations and decision-making (DeFarrari and Palmer, 2001), but few empirical studies have been performed to assess the quantitative benefits of such systems. Finally, banks have enjoyed greater productivity and performance with the use of MS tools such as data envelope analysis (DEA). However, there are areas that still deserve attention.

    Frequency distribution of Management Science/Operations Research in banking articles by the year of publication was compiled. Zanakis et al. (1986) found that in the period between 1977 and 1982 there was a great interest in conducting research and publishing journal articles on the topic of MS in banking. Our study found that later research in the area was fairly consistent during the period 19892009 and peaked in 1999. Over the next few years, research subsided and in 2003 the topic again became of an interest to researchers. This resulted in a growing number of articles published on new topics of deposit insurance, globalization of operations, cross-border mergers and acquisitions, national bank efficiency in Europe, Middle East, and former Soviet Republics, and other topics.

    The results of Table 3 show that the European Journal of Operational Research (12%) and the Journal of Banking and Finance (29.8%) contributed more articles than any other publication outlet together accounting for slightly less than half of the articles. Interfaces and Management Science each also contributed more than the rest of the journals (3.9% and 4.3%, respectively). Together, these four journals account for 50% of the articles published on Management Science applications in banking. Zanakis et al. (1986: 120) revealed that out of 29 journals they examined, the Journal of Bank Research was a single journal that published 38% of articles. It now appears that publications are more evenly distributed among journals.

    Despite their good intentions, Zanakis et al. (1986) were incorrect in their prediction of the prevalence of MIS/DSS use in banking in the future: "Although MS in banking as a journal article topic appears to have reached maturity, recent regulatory and technological developments, industry growth, and increased competition in the banking environment are expected to generate increased interest and more publications on this subject."

    In fact, this study found that the preferred techniques used 20 years ago, Statistical Analysis and Linear Programming, are still the top methods in use today. Linear Programming has enjoyed increased popularity due to technological advances such as data envelope analysis (DEA). In their study, Kantor and Maital (1999: 30) contended that DEA is used extensively to provide quantitative measures of each branch's efficiency relative to other similar branches. The most frequently used techniques (as shown in Table 4) are: linear programming, statistical analysis, other methods, stochastic programming, simulation, and MIS/EDP. User familiarity with certain techniques may play a key role in their choice of the techniques. In the past, efficiency models were used to measure banking efficiency. However, researchers now suggest efficiency models do not yield consistent performance results (Berger and Humphrey, 1997; Kumhhakar and Sarkar, 2002).

    Zanakis et al. (1986) study generated massive research in the banking operations. The results of Table 5 show the important banking areas where MS/OR techniques are most frequently applied, include operations assessment and improvement estimating or analyzing productivity/profitability/efficiency of operations, risk measurement and management, and mergers/acquisitions. Over the last decade, the banking industry experienced mass consolidation and innovation (DeFarrari and Palmer, 2001). This resulted in larger, more complex banks with an increase in asset concentration and risk exposure. DeFarrari and Palmer (2001) contended that globalization, regulatory restrictions and increased competition in financial markets triggered consolidation, which brought forth larger...

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