MANAGEMENT QUALITY AND X-INEFFICIENCY IN NATIONAL BANKS

This paper uses bank exam (CAMEL) ratings and an ordered legit model t o 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 c osts but significantly higher raw (accounting-based) unit costs than t he poorly managed banks. This result challenges the fundamental premis e 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 eff iciency.