Management Quality Measurement: Using Data Envelopment Analysis (DEA) Estimation Approach for Banks in Brazil

While the quality of a bank's management is generally acknowledged to be a key contributor to a financial institutional failure, it is usually not calculated for lack of an objective measure. This paper presents a new paradigm approach for quantifying a bank's managerial efficiency, using a data envelopment analysis (DEA) model that combines multiple inputs and outputs to compute a scalar measure of efficiency and management quality. The analysis of the largest 50 Brazilian banks over a twelve-year period from 1995 to 2006 shows significant differences in management quality scores between institutions. Hence, this new metric provides an important, but previously missing, modelling element for the early identification of troubled banks and can be used as a tool for off-site bank supervision in Brazil.