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Bank Attitude Toward Risk, Implicit Rates of Interest, and the Behavior of an Index of Risk Aversion for Commercial Banks

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  • Ronald A. Ratti

Abstract

This paper presents an analysis of a quasi-risk-averse bank facing uncertainty with respect to demand deposit flows and default risk on loans. On the basis of a formal model, testable hypotheses of bank attitude toward risk and the qualitative behavior of the index of relative risk aversion for commercial banks are developed. Through the use of data on the member banks of the Tenth Federal Reserve District, the empirical tests that were conducted indicated that banks are strongly risk-averse and that their index of relative risk aversion is increasing in profits. These results suggest that favorable (unfavorable) environmental changes will generate income effects that will result in proportionately less (more) risk taking by banks.

Suggested Citation

  • Ronald A. Ratti, 1980. "Bank Attitude Toward Risk, Implicit Rates of Interest, and the Behavior of an Index of Risk Aversion for Commercial Banks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 309-331.
    • Handle: RePEc:oup:qjecon:v:95:y:1980:i:2:p:309-331.
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    Cited by:

    1. Li, Jiyuan & Li, Zihui & Zhang, Min, 2023. "CFOs’ facial trustworthiness and bank loan contracts," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 332-357.
    2. R. Baupain & A. Durre, 2007. "The interday and intraday patterns of the overnight market : evidence from an electronic platform," Post-Print hal-00300195, HAL.
    3. Gander, James P., 2013. "Integrating bank profit and risk-avoidance decisions for selected European countries: A micro–macro analysis," Economic Modelling, Elsevier, vol. 31(C), pages 717-722.
    4. Duran, Miguel A., 2022. "The risk–return relation in the corporate loan market," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    5. Tudor, Kerry William, 1985. "The impact of management ability and market structure on the performance of agricultural banks in Iowa," ISU General Staff Papers 198501010800009749, Iowa State University, Department of Economics.
    6. Lin, Chen & Schmid, Thomas & Xuan, Yuhai, 2018. "Employee representation and financial leverage," Journal of Financial Economics, Elsevier, vol. 127(2), pages 303-324.
    7. Lafrance, Robert, 1983. "Évaluation de l’hypothèse de la moyenne-variance : une application au portefeuille des banques canadiennes," L'Actualité Economique, Société Canadienne de Science Economique, vol. 59(1), pages 20-37, mars.
    8. Ritz, Robert A. & Walther, Ansgar, 2015. "How do banks respond to increased funding uncertainty?," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 386-410.
    9. Anna Grodecka‐Messi, 2019. "Subprime borrowers, securitization and the transmission of business cycles," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(4), pages 1600-1654, November.
    10. Lafrance, R., 1982. "Evaluation de L'hypothese de la Moyenne-Variance: une Application au Portefeuille des Banques Canadiennes," Cahiers de recherche 8219, Universite de Montreal, Departement de sciences economiques.
    11. Camba-Mendez, Gonzalo & Mongelli, Francesco Paolo, 2021. "Risk aversion and bank loan pricing," Economics Letters, Elsevier, vol. 200(C).
    12. Yasuo Nishiyama, 2006. "The Asian Financial Crisis and Investors’ Risk Aversion," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(3), pages 181-205, September.
    13. Chase Econometric Associates for the Economic Development Division, 1981. "Regional Financial And Monetary Policy Analysis Model," Staff Reports 276719, United States Department of Agriculture, Economic Research Service.
    14. Nishiyama, Yasuo, 2011. "The term structure of CD rates and monetary policy transmission," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 82-94, January.

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