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The stability of bank efficiency rankings when risk preferences and objectives are different

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Author Info

  • Michael Koetter

Abstract

We analyze the stability of efficiency rankings of German universal banks between 1993 and 2004. First, we estimate traditional efficiency scores with stochastic cost and alternative profit frontier analysis. Then, we explicitly allow for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, we estimate input- and profit-demand functions to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency (PE). More importantly, rank-order correlation between these measures are low or even negative. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or PE may merely result from alternative yet efficiently chosen risk-return trade-offs.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701380068
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 14 (2008)
Issue (Month): 2 ()
Pages: 115-135

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Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:115-135

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Related research

Keywords: risk; efficiency; banks; Germany;

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Cited by:
  1. Diego Prior & Emili Tortosa-Ausina & Manuel Illueca & Mª Pilar Garcí­a-Alcober, 2014. "Earnings quality and performance in the banking industry: A profit frontier approach," Working Papers 2014/11, Economics Department, Universitat Jaume I, Castellón (Spain).

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