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Measuring Excessive Risk-Taking in Banking

Author

Listed:
  • Jiri Podpiera
  • Laurent Weill

Abstract

In this paper we propose a new approach to the assessment of excessive risk-taking by a banking sector. We use the portfolio approach to assess the optimal risk-return combination of a bank’s portfolio, based on data for 32 categories of loans. It provides a benchmark for the optimality of the bank’s portfolio. We apply this method on an exhaustive sample of Czech banks for the period January 2005–-February 2008. We observe an average excess of risk-taking of 33% of the optimal risk (excessive risk-taking thus measures the percentage reduction in the risk of the portfolio that the banking sector could have exhibited had the portfolio been efficient) and a reduction of this excess risk over the analysed period.

Suggested Citation

  • Jiri Podpiera & Laurent Weill, 2009. "Measuring Excessive Risk-Taking in Banking," Working Papers 2009/3, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2009/3
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2009_03.pdf
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    References listed on IDEAS

    as
    1. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    2. Anca Pruteanu-Podpiera & Jiří Podpiera, 2008. "The Czech transition banking sector instability: the role of operational cost management," Economic Change and Restructuring, Springer, vol. 41(3), pages 209-219, September.
    3. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
    4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    5. Guttentag, Jack & Herring, Richard, 1984. " Credit Rationing and Financial Disorder," Journal of Finance, American Finance Association, vol. 39(5), pages 1359-1382, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Diana Zigraiova, 2015. "Management Board Composition of Banking Institutions and Bank Risk-Taking: The Case of the Czech Republic," Working Papers 2015/14, Czech National Bank, Research Department.
    2. Jan Hanousek & Evžen Kočenda, 2017. "Dopady vlastnické struktury, firemních charakteristik a krize na efektivitu českých podniků
      [Impact of Ownership Type, Firm Characteristics and Crisis on Efficiency of the Czech Firms]
      ," Politická ekonomie, University of Economics, Prague, vol. 2017(1), pages 3-25.

    More about this item

    Keywords

    Bank; financial stability; risk-taking; transition countries.;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G - Financial Economics
    • P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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