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Heterogeneous effects of risk-taking on bank efficiency : a stochastic frontier model with random coefficients

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  • Galán, Jorge E.
  • Sarmiento, Miguel

Abstract

We estimate a stochastic frontier model with random inefficiency parameters, which allows us not only to identify the role of bank risk-taking on driving cost and profit inefficiency, but also to recognize heterogeneous effects of risk exposure on banks with different characteristics. We account for an integral group of risk exposure covariates including credit, liquidity, capital and market risk, as well as bank-specific characteristics of size and affiliation. The model is estimated for the Colombian banking sector during the period 2002-2012. Results suggest that risk-taking drives inefficiency and its omission leads to over (under) estimate cost (profit) efficiency. Risk-taking is also found to have different effects on efficiency of banks with different size and affiliation, and those involved in mergers and acquisitions. In particular, greater exposures to credit and market risk are found to be key profit efficiency drivers.Likewise, lower liquidity risk and capital risk lead to higher efficiency in both costs and profits. Large, foreign and merged banks benefit more when assuming credit risk, while small, domestic and non-merged banks institutions take advantage of assuming higher market risk

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  • Galán, Jorge E. & Sarmiento, Miguel, 2014. "Heterogeneous effects of risk-taking on bank efficiency : a stochastic frontier model with random coefficients," DES - Working Papers. Statistics and Econometrics. WS ws142013, Universidad Carlos III de Madrid. Departamento de Estadística.
  • Handle: RePEc:cte:wsrepe:ws142013
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    Cited by:

    1. Carolina Ortega Londoño, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo CIEF 016792, Universidad EAFIT.
    2. Carolina Ortega Londoño & Diego Restrepo, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo CIEF 016987, Universidad EAFIT.
    3. Leon Rincon, C.E., 2015. "Financial stability from a network perspective," Other publications TiSEM bb2e4e44-e842-45c6-a946-4, Tilburg University, School of Economics and Management.

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    Keywords

    Bank efficiency;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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