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Modelling and measuring business risk and the resiliency of retail banks

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  • M. Chaffai
  • M. Dietsch

Abstract

The paper uses recent developments of the methodology of efficiency frontiers to provide an original modeling of the risk of volatility of banking profits which relies on the estimation of a profit frontier. This methodology allows taking into account coordinated adjustments of banks’ costs to revenues as well as the absence of such adjustments. The study uses data of more than ninety French institutions running a retail banking business model over the period 1993 to 2012. Results confirm the resiliency of retail banks in crisis period. The decrease in profitability seems largely sustainable even if case of severe shocks. Thus, in case of a large drop in the banks’ lending activity, profit decreases moderately if costs are adjusted quickly, more largely if they are not. A shock on the provision of liquidity services shows less significant effects. In case where banks cannot adjust operating costs, only a very strong shock precipitating banks in the situation of the 5% less profitable could destroy completely yearly profits.

Suggested Citation

  • M. Chaffai & M. Dietsch, 2014. "Modelling and measuring business risk and the resiliency of retail banks," Débats économiques et financiers 14, Banque de France.
  • Handle: RePEc:bfr:decfin:14
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Fabrice Borel-Mathurin & Stéphane Loisel & Johan Segers, 2017. "Re-evaluation of the capital charge in insurance after a large shock: empirical and theoretical views," EIOPA Financial Stability Report - Thematic Articles 10, EIOPA, Risks and Financial Stability Department.
    3. J. Hombert & V. Lyonnet, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," Débats économiques et financiers 30, Banque de France.
    4. Papanikolaou, Nikolaos I., 2018. "To be bailed out or to be left to fail? A dynamic competing risks hazard analysis," Journal of Financial Stability, Elsevier, vol. 34(C), pages 61-85.

    More about this item

    Keywords

    Bank solvency; Retail Banking; Business Risk; Efficiency Frontier Methodology; Profit Function.;

    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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