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Bank Efficiency, Risk‐Based Capital, and Real Estate Exposure: The Credit Crunch Revisited

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  • William L. Weber
  • Michael Devaney

Abstract

The turbulent real estate market during the early 1990s coincided with the implementation of risk‐based capital standards for commercial banks. In this study we use non‐parametric linear programming techniques to identify the lost real estate lending due to bank inefficiency. Inefficiency may arise from one of three sources: risk‐based capital standards which constrain bank real estate lending, inefficiency stemming from managerial oversight of real estate lending, and scale inefficiency which arises from banks not operating at constant returns to scale. The results indicate that the lost real estate lending associated with risk‐based capital standards averaged 2.7% of total bank assets. However, banks could compensate by exercising better managerial oversight of real estate lending and by operating at constant returns to scale.

Suggested Citation

  • William L. Weber & Michael Devaney, 1999. "Bank Efficiency, Risk‐Based Capital, and Real Estate Exposure: The Credit Crunch Revisited," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 27(1), pages 1-25, March.
    • Handle: RePEc:bla:reesec:v:27:y:1999:i:1:p:1-25
    DOI: 10.1111/1540-6229.00764
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    References listed on IDEAS

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    1. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria.
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    Cited by:

    1. Lucia Gibilaro & Gianluca Mattarocci, 2016. "Are Real Estate Banks More Affected by Real Estate Market Dynamics?," International Real Estate Review, Global Social Science Institute, vol. 19(2), pages 151-170.
    2. Hirofumi Fukuyama & William Weber, 2015. "Measuring Japanese bank performance: a dynamic network DEA approach," Journal of Productivity Analysis, Springer, vol. 44(3), pages 249-264, December.
    3. Rolf Fare & Shawna Grosskopf & William Weber, 2004. "The effect of risk-based capital requirements on profit efficiency in banking," Applied Economics, Taylor & Francis Journals, vol. 36(15), pages 1731-1743.
    4. Fukuyama, Hirofumi & Weber, William L., 2005. "Estimating output gains by means of Luenberger efficiency measures," European Journal of Operational Research, Elsevier, vol. 164(2), pages 535-547, July.

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