IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v36y2004i15p1731-1743.html
   My bibliography  Save this article

The effect of risk-based capital requirements on profit efficiency in banking

Author

Listed:
  • Rolf Fare
  • Shawna Grosskopf
  • William Weber

Abstract

The purpose of this paper is twofold: to show how to measure profit efficiency in banking using a newly developed technique, and to use that technique to determine the effect of risk-based capital requirements on the profit performance of US banks. The measure of profit efficiency used captures deviations from profit maximization arising from technical inefficiency, caused by a lack of managerial oversight and allocative inefficiency, which is caused by managers choosing a nonoptimal mix of inputs and outputs. A leverage ratio constraint and a risk-weighted capital ratio constraint are explicitly included in the model, which allows identification of the effect on profits of those constraints. The techniques are applied to random samples of US banks for 1990, 1992, and 1994. The results indicate that allocative inefficiency is a larger source of profit loss than technical inefficiency and that the risk-based capital standards have a significant effect on bank allocative efficiency.

Suggested Citation

  • Rolf Fare & Shawna Grosskopf & William Weber, 2004. "The effect of risk-based capital requirements on profit efficiency in banking," Applied Economics, Taylor & Francis Journals, vol. 36(15), pages 1731-1743.
  • Handle: RePEc:taf:applec:v:36:y:2004:i:15:p:1731-1743
    DOI: 10.1080/0003684042000218525
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000218525
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:36:y:2004:i:15:p:1731-1743. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.