Measuring Excessive Risk-Taking in Banking
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 bankâ€™s portfolio, based on data for 32 categories of loans. It provides a benchmark for the optimality of the bankâ€™s portfolio. We apply this method on an exhaustive sample of Czech banks for the period January 2005â€“-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.
|Date of creation:||Sep 2009|
|Date of revision:|
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