The Influence of Risk-taking on Bank Efficiency: Evidence from Colombia

N.M. Sarmiento Paipilla, Jorge E. Galán

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Abstract

We present a stochastic frontier model with random inefficiency parameters
which is able to capture the influence of risk-taking on bank efficiency and that
distingues those effects among banks with different characteristics. Cost and profit efficiency are found to be over- and underestimated when risk measures are not accurately modeled. We find that more capitalized banks are more cost and profit efficient, while banks assuming more credit risk are less cost efficient but more profit efficient. The magnitude of these effects vary with bank's size and affiliation. Liquidity is found to affect cost efficiency only for domestic banks. Large and foreign banks benefit more from higher credit and market risk exposures, while small and domestic banks find more advantageous to be more capitalized. We identify some channels that explain these differences and provide insights for macroprudential regulation.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages30
Volume2015-036
Publication statusPublished - 6 Jul 2015

Publication series

NameCentER Discussion Paper
Volume2015-036

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Keywords

  • bank efficiency
  • Bayesian inference
  • Heterogeneity
  • random parameters
  • risk-taking
  • stochastic frontier models

Cite this

Sarmiento Paipilla, N. M., & Galán, J. E. (2015). The Influence of Risk-taking on Bank Efficiency: Evidence from Colombia. (CentER Discussion Paper; Vol. 2015-036). Tilburg: CentER, Center for Economic Research.