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Integrating bank profit and risk-avoidance decisions for selected European countries: A micro–macro analysis

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  • Gander, James P.

Abstract

A two-equation integrated model is developed to capture bank profit and risk-avoidance decisions. Output is limited to customer loans. The profit function is based on output and selected inputs. Risk-avoidance (using the capitalization ratio) depends on micro and micro∗macro interactive variables. The SUR method is used to test the hypothesis that the two functions are interdependent. Also, a single reduced-form equation is derived from the SUR model to analyze the volatility of the capitalization ratio. Five European countries and their banks for the period 1991–2001 are used to run the regressions and to test the hypothesis. The individual statistical results were generally consistent with similar results found in the literature. The Breusch–Pagan test of independence was rejected. A key finding from the volatility analysis suggests that bank profit rates are inversely related to the volatility of the banks' capitalization ratios as measured by their variances.

Suggested Citation

  • Gander, James P., 2013. "Integrating bank profit and risk-avoidance decisions for selected European countries: A micro–macro analysis," Economic Modelling, Elsevier, vol. 31(C), pages 717-722.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:717-722
    DOI: 10.1016/j.econmod.2013.01.014
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    More about this item

    Keywords

    Bank behavior; Profit; Capital ratios; Volatility;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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