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Bank Risk, Capitalization and Inefficiency

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  • Simon Kwan
  • Robert A. Eisenbeis

Abstract

This paper employs a simultaneous equations approach to measuring the tradeoffs between risk, capitalization and measured inefficiencies in a sample of 254 large bank holding companies over the period 1986 through 1991. The results confirm the belief that these three variables are simultaneously determined. Furthermore, asymmetries were identified in the relationship between risk and inefficiencies. Support was found in the asset risk equations for the hypothesis that less efficient institutions took on more risk to off set this inefficiency, thereby transferring risk to the deposit insurance finds. Similarly, less efficient institutions tended to be less well capitalized, a result that may also be associated with differences in management quality. Finally, evidence is provided that risk averse managers tend to expend real resources to reduce asset risk, which makes them appear to be inefficient, when compared to efficiency measures derived under the assumption of risk neutrality. This paper was presented at the Financial Institutions Center's October 1996 conference on "

Suggested Citation

  • Simon Kwan & Robert A. Eisenbeis, 1995. "Bank Risk, Capitalization and Inefficiency," Center for Financial Institutions Working Papers 96-35, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:96-35
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    File URL: http://fic.wharton.upenn.edu/fic/papers/96/9635.pdf
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    References listed on IDEAS

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    8. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-1244, December.
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    12. Joseph P. Hughes & William Lang & Loretta J. Mester & Choon-Geol Moon, 1995. "Recovering Technologies that Account for Generalized Managerial Preferences: An Application to Non-Risk-Neutral Banks," Center for Financial Institutions Working Papers 95-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. Kwan, Simon H. & Eisenbeis, Robert A., 1995. "An analysis of inefficiencies in banking," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 733-734, June.
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    Cited by:

    1. Omar Masood & Bora Aktan & Sahil Chaudhary, 2009. "The investment decision-making process from a risk manager's perspective: a survey," Qualitative Research in Financial Markets, Emerald Group Publishing, vol. 1(2), pages 106-120, June.
    2. Rungporn Roengpitya, 2008. "The Effects of Financial Deregulation on Bank Governance: The Panel Data Evidence of the 1990s," Working Papers 2008-08, Monetary Policy Group, Bank of Thailand.
    3. Ghosh, Saibal, 2010. "Credit Growth, Bank Soundness and Financial Fragility: Evidence from Indian Banking Sector," MPRA Paper 24715, University Library of Munich, Germany.
    4. Abhiman Das, 2004. "Risk and Productivity Change of Public Sector Banks," Industrial Organization 0411002, EconWPA.
    5. Trevor Fitzpatrick & Kieran McQuinn, 2005. "Labour Cost Efficiency in UK and Irish Credit Institutions," The Economic and Social Review, Economic and Social Studies, vol. 36(1), pages 45-66.
    6. A Das & S Ghosh, 2007. "Determinants of Credit Risk in Indian State-owned Banks: An Empirical Investigation," Economic Issues Journal Articles, Economic Issues, vol. 12(2), pages 27-46, September.
    7. Antonio Lopes & Luca Giordano, 2006. "Risk Preference and Investments Quality as Determinants of Efficiency in the Italian Banking System," Quaderni DSEMS 12-2006, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    8. repec:taf:rjapxx:v:14:y:2009:i:3:p:270-286 is not listed on IDEAS
    9. Saibal Ghosh, 2009. "Charter value and risk-taking: evidence from Indian banks," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 14(3), pages 270-286.
    10. O. Emre Ergungor & C. N. V. Krishnan & Ajai K. Singh & Allan A. Zebedee, 2004. "Bank seasoned equity offers: do voluntary and involuntary offers differ?," Working Paper 0414, Federal Reserve Bank of Cleveland.
    11. Fitzpatrick, Trevor & McQuinn, Kieran, 2004. "Cost Efficiency in UK and Irish Credit Institutions," Research Technical Papers 3/RT/04, Central Bank of Ireland.

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