Management Quality and X-Inefficiency in National Banks

Abstract

This paper uses bank exam (CAMEL) ratings and an ordered logit model to separate national banks into well-managed and poorly managed samples, then estimates a thick cost frontier model for these two samples of banks. The well-managed banks had significantly lower estimated unit costs but significantly higher raw (accounting-based) unit costs than the poorly managed banks. This result challenges the fundamental premise of the thick cost frontier approach—that raw unit costs can be used to separate cost-efficient from cost-inefficient banks—and reenforces the notion that simple accounting benchmarks can misrepresent cost efficiency.