Good Management in Banking

Abstract

We present and estimate a model of management practices as technology of the banking firm. Management is an unobserved (latent) input in the production function of banks, which we estimate at the bank-quarter level using data for all U.S. banks from 1984 to 2016 and Bayesian techniques. We show that management practices are, next to deposits funding, the most important input in the banks’ production process, explaining an important part of bank performance and risk. We validate our approach using repeated random sampling (Monte Carlo simulation) within a rather unfavorable environment. Our model can be considered as benchmark to robustly estimate good management practices, to analyze their sources, and to establish good management as an important determinant of efficient and sound banking.

Keywords: Banking, Management Practices, Cost Function, Bayesian Methods, Monte Carlo Simulation

JEL Classification: G30, G21, L22, M10