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Measuring Excessive Risk-Taking in Banking

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Abstract

In this paper the authors propose a new approach to the assessment of excessive risk-taking by a banking sector. They use the portfolio approach to assess the optimal risk-return combination of a bank’s portfolio, based on data for 32 categories of loans. It provides a benchmark for the optimality of the bank’s portfolio. The authors apply this method on an exhaustive sample of Czech banks for the period January 2005–February 2008. They observe an average excess of risk-taking of 33% of the optimal risk and a slight reduction of this excess risk over the analyzed period.

Suggested Citation

  • Jiri Podpiera & Laurent Weill, 2010. "Measuring Excessive Risk-Taking in Banking," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 60(4), pages 294-306, November.
    • Handle: RePEc:fau:fauart:v:60:y:2010:i:4:p:294-306
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    References listed on IDEAS

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    1. Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, vol. 4(2), pages 135-148, June.
    2. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    3. Anca Pruteanu-Podpiera & Jiří Podpiera, 2008. "The Czech transition banking sector instability: the role of operational cost management," Economic Change and Restructuring, Springer, vol. 41(3), pages 209-219, September.
    4. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    5. Guttentag, Jack & Herring, Richard, 1984. "Credit Rationing and Financial Disorder," Journal of Finance, American Finance Association, vol. 39(5), pages 1359-1382, December.
    6. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
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    Cited by:

    1. Jan Hanousek & Evžen Kočenda, 2017. "Dopady vlastnické struktury, firemních charakteristik a krize na efektivitu českých podniků [Impact of Ownership Type, Firm Characteristics and Crisis on Efficiency of the Czech Firms]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(1), pages 3-25.
    2. Jan Hanousek & Evžen Kočenda & Anastasiya Shamshur, 2014. "Efektivita evropských firem [Efficiency of European Firms]," Politická ekonomie, Prague University of Economics and Business, vol. 2014(3), pages 303-322.
    3. Diana Zigraiova, 2015. "Management Board Composition of Banking Institutions and Bank Risk-Taking: The Case of the Czech Republic," Working Papers 2015/14, Czech National Bank.

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    More about this item

    Keywords

    bank; financial stability; risk-taking; transition countries;
    All these keywords.

    JEL classification:

    • 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
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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