On modeling banking risk

Mike Tsionas

No 183, Working Papers from Bank of Greece

Abstract: The paper develops new indices of financial stability based on an explicit model of expected utility maximization by financial institutions subject to the classical technology restrictions of neoclassical production theory. The model can be estimated using standard econometric techniques, like GMM for dynamic panel data and latent factor analysis for the estimation of covariance matrices. An explicit functional form for the utility function is not needed and we show how measures of risk aversion and prudence (downside risk aversion) can be derived and estimated from the model. The model is estimated using data for Eurozone countries and we focus particularly on (i) the use of the modeling approach as an “early warning mechanism”, (ii) the bank- and country-specific estimates of risk aversion and prudence (downside risk aversion), and (iii) the derivation of a generalized measure of risk that relies on loan-price uncertainty.

Keywords: Financial Stability; Banking; Expected Utility Maximization; Sub-prime crisis; Financial Crisis; Eurozone; PIIGS. (search for similar items in EconPapers)
JEL-codes: C51 C54 D21 D22 G20 G21 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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