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Abstract

In this paper we propose a new approach to the assessment of excessive risk-taking by a banking sector. We use the portfolio approach to assess the optimal risk-return combination of a bank’s portfolio, based on data for 32 categories of loans. It provides a benchmark for the optimality of the bank’s portfolio. We apply this method on an exhaustive sample of Czech banks for the period January 2005–-February 2008. We observe an average excess of risk-taking of 33% of the optimal risk (excessive risk-taking thus measures the percentage reduction in the risk of the portfolio that the banking sector could have exhibited had the portfolio been efficient) and a reduction of this excess risk over the analysed period.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2009/3.

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Date of creation: Sep 2009
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Handle: RePEc:cnb:wpaper:2009/3

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Related research

Keywords: Bank; financial stability; risk-taking; transition countries.;

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Find related papers by JEL classification:

• G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
• G - Financial Economics
• P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
2. Anca Pruteanu-Podpiera & Jiří Podpiera, 2008. "The Czech transition banking sector instability: the role of operational cost management," Economic Change and Restructuring, Springer, vol. 41(3), pages 209-219, September.
3. Allen N. Berger & Robert DeYoung, 1996. "Problem loans and cost efficiency in commercial banks," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 219-236.
   
   • Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
   • Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.).
   • Allen N. Berger & Robert DeYoung, 1995. "Problem Loans and Cost Efficiency in Commercial Banks," Center for Financial Institutions Working Papers 96-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
4. Guttentag, Jack & Herring, Richard, 1984. " Credit Rationing and Financial Disorder," Journal of Finance, American Finance Association, vol. 39(5), pages 1359-82, December.
5. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
   
   • Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers 144, Bank of England.

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