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A new method to estimate the risk of financial intermediaries

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  • Delis, Manthos D
  • Tsionas, Efthymios

Abstract

In this paper we reconsider the formal estimation of the risk of financial intermediaries. Risk is modeled as the variability of the profit function of a representative intermediary, here a bank, as formally considered in finance theory. In turn, banking theory suggests that risk is determined simultaneously with profits and other bank- and industry-level characteristics that cannot be considered predetermined when profit-maximizing decisions of financial institutions are to be made. Thus, risk is endogenous. We estimate the new model on a panel of US banks, spanning the period 1985q1-2010q2. The findings suggest that risk was fairly stable up to 2001 and accelerated quickly thereafter and up to 2007. Indices of bank risk commonly used in the literature do not capture this trend and/ or the scale of the increase.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34735.

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Date of creation: 07 Mar 2012
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Handle: RePEc:pra:mprapa:34735

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Related research

Keywords: Risk of financial intermediaries; Endogenous risk; Full information maximum likelihood; Profit function; Duality;

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  1. Allen N. Berger & David B. Humphrey, 1997. "Efficiency of financial institutions: international survey and directions for future research," Finance and Economics Discussion Series 1997-11, Board of Governors of the Federal Reserve System (U.S.).
  2. Dangl, Thomas & Zechner, Josef, 2003. "Credit Risk and Dynamic Capital Structure Choice," CEPR Discussion Papers 4132, C.E.P.R. Discussion Papers.
  3. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704.
  4. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
  5. Degryse, Hans & Kim, Moshe & Ongena, Steven, 2009. "Microeconometrics of Banking Methods, Applications, and Results," OUP Catalogue, Oxford University Press, number 9780195340471, August.
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