The Influence of Risk-taking on Bank Efficiency

Evidence from Colombia

N.M. Sarmiento Paipilla, Jorge E. Galán

Research output: Working paperDiscussion paperOther research output

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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
PublisherEuropean Banking Center
Number of pages30
Volume2015-008
Publication statusPublished - 6 Jul 2015

Publication series

NameEuropean Banking Center
Volume2015-008

Fingerprint

Colombia
Risk taking
Bank efficiency
Profit
Costs
Credit risk
Risk measures
Stochastic frontier model
Market risk
Liquidity
Macroprudential regulation
Foreign banks
Bank size
Inefficiency
Risk exposure
Profit efficiency

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. (European Banking Center; Vol. 2015-008). Tilburg: European Banking Center.
Sarmiento Paipilla, N.M. ; Galán, Jorge E. / The Influence of Risk-taking on Bank Efficiency : Evidence from Colombia. Tilburg : European Banking Center, 2015. (European Banking Center).
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Sarmiento Paipilla, NM & Galán, JE 2015 'The Influence of Risk-taking on Bank Efficiency: Evidence from Colombia' European Banking Center, vol. 2015-008, European Banking Center, Tilburg.

The Influence of Risk-taking on Bank Efficiency : Evidence from Colombia. / Sarmiento Paipilla, N.M.; Galán, Jorge E.

Tilburg : European Banking Center, 2015. (European Banking Center; Vol. 2015-008).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - The Influence of Risk-taking on Bank Efficiency

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AU - Galán, Jorge E.

PY - 2015/7/6

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N2 - We present a stochastic frontier model with random inefficiency parameterswhich is able to capture the influence of risk-taking on bank efficiency and thatdistingues 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.

AB - We present a stochastic frontier model with random inefficiency parameterswhich is able to capture the influence of risk-taking on bank efficiency and thatdistingues 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.

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KW - Heterogeneity

KW - random parameters

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KW - stochastic frontier models

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Sarmiento Paipilla NM, Galán JE. The Influence of Risk-taking on Bank Efficiency: Evidence from Colombia. Tilburg: European Banking Center. 2015 Jul 6. (European Banking Center).