The impact of management ability and market structure on the performance of agricultural banks in Iowa

The effects of management ability and market structure on the performance of agricultural banks are assessed using observations on 444 Iowa banks from the years 1976 and 1978. Management ability is measured by the ratio of assets to employees, market structure is measured by a Herfindahl index and a market share variable, and bank performance is represented by the ratio of loans to total assets and the ratio of time and savings deposits to total deposits. Ordinary least squares analysis indicates that market structure strongly influences the ratio of time and savings deposits to total deposits but does not influence the ratio of loans to total assets. Management ability strongly influences the ratio of time and savings deposits to total deposits and weakly influences the ratio of loans to total assets. Two-stage and three-stage least squares analyses indicate that coefficients on market structure variables are not invariant to estimation method, but there is no strong evidence that market structure variables should be treated as endogenous rather than exogenous variables. A Chow test reveals that market structure variables do not measure market concentration in single bank communities and multiple bank communities equally well when banks from both types of communities are contained in the sample. Empirical results also indicate that Production Credit Associations influence the ratio of time and savings deposits to total deposits at agricultural banks but do not influence the ratio of loans to total assets;Changes in banking market structure that result from financial deregulation apparently will affect the liability side of agricultural bank balance sheets more strongly than the asset side. In order to mitigate the negative impacts of financial deregulation, bank owners and managers should seek ways of improving management ability. Future research should continue to explore the relationship between management ability and agricultural bank performance, but that research must be preceded by, or include, development of innovative measures of banking market concentration and exploration of relationships between Production Credit Association activities and bank performance.