Heterogeneous effects of risk-taking on bank efficiency: a stochastic frontier model with random coefficients

Miguel Sarmiento (nsarmipa@banrep.gov.co) and Jorge Galan

DES - Working Papers. Statistics and Econometrics. WS from Universidad Carlos III de Madrid. Departamento de Estadística

Abstract: We estimate a stochastic frontier model with random inefficiency parameters, which allows us not only to identify the role of bank risk-taking on driving cost and profit inefficiency, but also to recognize heterogeneous effects of risk exposure on banks with different characteristics. We account for an integral group of risk exposure covariates including credit, liquidity, capital and market risk, as well as bank-specific characteristics of size and affiliation. The model is estimated for the Colombian banking sector during the period 2002-2012. Results suggest that risk-taking drives inefficiency and its omission leads to over (under) estimate cost (profit) efficiency. Risk-taking is also found to have different effects on efficiency of banks with different size and affiliation, and those involved in mergers and acquisitions. In particular, greater exposures to credit and market risk are found to be key profit efficiency drivers.Likewise, lower liquidity risk and capital risk lead to higher efficiency in both costs and profits. Large, foreign and merged banks benefit more when assuming credit risk, while small, domestic and non-merged banks institutions take advantage of assuming higher market risk

Keywords: Bank; efficiency; Bayesian; Inference; Risk-Taking; Stochastic; frontier; models; Heterogeneity; Random; Parameters (search for similar items in EconPapers)
JEL-codes: C11 C23 C51 D24 G21 G32 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ban, nep-eff and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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