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The influence of risk-taking on bank efficiency: Evidence from Colombia

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  • Sarmiento, Miguel
  • Galán, Jorge E.

Abstract

This paper shows evidence on the influence of risk-taking on bank efficiency in emerging markets and identifies heterogeneity in the way risk affects banks with different characteristics. We fit a stochastic frontier model with random inefficiency parameters to a sample of Colombian banks. The model provides accurate cost and profit efficiency estimates. The effects of risk-taking on efficiency vary with size and affiliation. Large and foreign banks benefit more from higher exposure to credit and market risk, while domestic and small banks from being more capitalised. We identify some channels explaining these differences and provide insights for prudential regulation.

Suggested Citation

  • Sarmiento, Miguel & Galán, Jorge E., 2017. "The influence of risk-taking on bank efficiency: Evidence from Colombia," Emerging Markets Review, Elsevier, vol. 32(C), pages 52-73.
    • Handle: RePEc:eee:ememar:v:32:y:2017:i:c:p:52-73
    DOI: 10.1016/j.ememar.2017.05.007
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    8. M.V. Leonov, 2021. "Review of Modern Approaches for Assessing the Effectiveness of Banking," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 20(2), pages 294-326.
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    Keywords

    Bank efficiency; Bayesian inference; Heterogeneity; Random parameters; Risk-taking; Stochastic frontier models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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