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Modelling and measuring business risk and the resiliency of retail banks

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  • Chaffai, Mohamed
  • Dietsch, Michel

Abstract

The recent banking crisis has revealed the existence of strong resiliency factors in the retail banking business model. On average, retail banks suffered less than other financial institutions from unexpected market changes. This paper proposes a new methodology to measure retail banks' business risk, which is defined as the risk of adverse and unexpected changes in banks' profits coming from sudden changes in the banks' activities. This methodology is based on the efficiency frontier methodology, and, more specifically, on the duality property between the directional distance function and the profitfunction. Using the distance function to compute banks' profitability, we take the distance to the frontier of best practices as a measure of profit inefficiency, ie of unexpected losses related to underperformance. In this approach, shifts in the efficiency frontier induced by adverse shocks to banks' volumes serve as a measure of business risk. This measure of profit volatility allows a measurement to be made of the impact of volume changes on banks' profits. This method is applied to a database containing halfyearly regulatory accounting reports over the 1993-2011 period for more than 90 French banks running a retail banking business model. Our results verify a low level of business risk in retail banking, thus confirming the resiliency of the retail banks' business model.

Suggested Citation

  • Chaffai, Mohamed & Dietsch, Michel, 2013. "Modelling and measuring business risk and the resiliency of retail banks," Discussion Papers 35/2013, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:352013
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    Cited by:

    1. B. Camara & F.-D. Castellani & H. Fraisse & L. Frey & C. Héam & L. Labonne & V. Martin, 2015. "MERCURE : A Macroprudential Stress Testing Model developed at the ACPR," Débats économiques et financiers 19, Banque de France.
    2. Fabrice Borel-Mathurin & Stéphane Loisel & Johan Segers, 2017. "Re-evaluation of the capital charge in insurance after a large shock: empirical and theoretical views," EIOPA Financial Stability Report - Thematic Articles 10, EIOPA, Risks and Financial Stability Department.
    3. repec:eee:finsta:v:34:y:2018:i:c:p:61-85 is not listed on IDEAS
    4. J. Hombert & V. Lyonnet, 2017. "Intergenerational Risk Sharing in Life Insurance: Evidence from France," Débats économiques et financiers 30, Banque de France.
    5. Papanikolaou, Nikolaos I., 2018. "To be bailed out or to be left to fail? A dynamic competing risks hazard analysis," Journal of Financial Stability, Elsevier, vol. 34(C), pages 61-85.

    More about this item

    Keywords

    Bank solvency; Retail Banking; Business Risk; Efficiency Analysis; Profit Frontier;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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