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Modelling and measuring business risk and the resiliency of retail banks


  • Chaffai, Mohamed
  • Dietsch, Michel


The recent banking crisis has revealed the existence of strong resiliency factors in the retail banking business model. On average, retail banks suffered less than other financial institutions from unexpected market changes. This paper proposes a new methodology to measure retail banks’ business risk, which is defined as the risk of adverse and unexpected changes in banks’ profits coming from sudden changes in the banks’ activities. This methodology is based on the efficiency frontier methodology, and, more specifically, on the duality property between the directional distance function and the profit function. Using the distance function to compute banks’ profitability, we take the distance to the frontier of best practices as a measure of profit inefficiency, i.e. of unexpected losses related to underperformance. In this approach, shifts in the efficiency frontier induced by adverse shocks to banks’ volumes serve as a measure of business risk. This measure of profit volatility allows a measurement to be made of the impact of volume changes on banks’ profits. This method is applied to a database containing half yearly regulatory accounting reports over the 1993–2011 period for a sample of quite all French banks running a retail banking business model. Our results verify a low level of business risk in retail banking, thus confirming the resiliency of the retail banks’ business model.

Suggested Citation

  • Chaffai, Mohamed & Dietsch, Michel, 2015. "Modelling and measuring business risk and the resiliency of retail banks," Journal of Financial Stability, Elsevier, vol. 16(C), pages 173-182.
  • Handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:173-182 DOI: 10.1016/j.jfs.2014.08.004

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    References listed on IDEAS

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    Cited by:

    1. F. Borel-Mathurin & S. Loisel & J. Segers, 2017. "Reevaluation of the capital charge in insurance after a large shock: empirical and theoretical views," Débats économiques et financiers 32, Banque de France.
    2. B. Camara & F.-D. Castellani & H. Fraisse & L. Frey & C. Héam & L. Labonne & V. Martin, 2015. "MERCURE : A Macroprudential Stress Testing Model developed at the ACPR," Débats économiques et financiers 19, Banque de France.
    3. J. Hombert & V. Lyonnet, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," Débats économiques et financiers 30, Banque de France.

    More about this item


    Bank solvency; Retail banking; Business risk; Efficiency analysis; Profit;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity


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