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Modelling and measuring business risk and the resiliency of retail banks

Listed author(s):
  • M. Chaffai
  • M. Dietsch

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.

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File URL: http://acpr.banque-france.fr/fileadmin/user_upload/acp/publications/Debats_economiques_et_financiers/201412-Modelling-and-measuring-business-risk-and-the-resiliency-of-retail-banks.pdf
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Paper provided by Banque de France in its series Débats économiques et financiers with number 14.

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Length: 36 pages
Date of creation: 2014
Handle: RePEc:bfr:decfin:14
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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  1. Berlin, Mitchell & Mester, Loretta J., 1998. "On the profitability and cost of relationship lending," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 873-897, August.
  2. Mohamed E. Chaffai & Michel Dietsch, 2009. "The Effect of the Environment on Profit Efficiency of Bank Branches," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  3. Berger, Allen N. & Leusner, John H. & Mingo, John J., 1997. "The efficiency of bank branches," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 141-162, September.
  4. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
  5. Silva Portela, Maria Conceicao A. & Thanassoulis, Emmanuel, 2005. "Profitability of a sample of Portuguese bank branches and its decomposition into technical and allocative components," European Journal of Operational Research, Elsevier, vol. 162(3), pages 850-866, May.
  6. 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.
  7. Fare, Rolf & Grosskopf, Shawna & Noh, Dong-Woon & Weber, William, 2005. "Characteristics of a polluting technology: theory and practice," Journal of Econometrics, Elsevier, vol. 126(2), pages 469-492, June.
  8. J. Christina Wang & Susanto Basu & John G. Fernald, 2009. "A General-Equilibrium Asset-Pricing Approach to the Measurement of Nominal and Real Bank Output," NBER Chapters,in: Price Index Concepts and Measurement, pages 273-320 National Bureau of Economic Research, Inc.
  9. Park, Kang H. & Weber, William L., 2006. "A note on efficiency and productivity growth in the Korean Banking Industry, 1992-2002," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2371-2386, August.
  10. J. Christina Wang & Susanto Basu, 2005. "Risk bearing, implicit financial services, and specialization in the financial industry," Public Policy Discussion Paper 06-3, Federal Reserve Bank of Boston.
  11. Dietsch, Michel & Lozano-Vivas, Ana, 2000. "How the environment determines banking efficiency: A comparison between French and Spanish industries," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 985-1004, June.
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