The financial crisis and the shadow price of bank capital

Maryam Hasannasab, Dimitris Margaritis () and Christos Staikouras
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Maryam Hasannasab: Kharazmi University
Dimitris Margaritis: University of Auckland Business School
Christos Staikouras: Athens University of Business and Economics

Annals of Operations Research, 2019, vol. 282, issue 1, No 7, 154 pages

Abstract: Abstract We employ parametric forms of directional distance functions to obtain shadow prices of bank equity capital for listed and unlisted banks. We exploit cost, revenue and profit maximisation as the optimisation criteria to derive pricing rules, which allow us to find shadow prices for both inputs and outputs by explicitly accounting for the bank’s capital structure choices and hence risk-taking behaviour. We show how knowledge of one input price can be used to price outputs and how knowledge of one output price can be used to price inputs along with information on input and output quantities. We also show how information on total cost or revenue can be used to shadow price inputs and outputs, respectively. We obtain some striking results highlighting the perils of overambitious balance sheet expansions supported by excessive leverage. More specifically, we show that shadow prices for equity capital had reached abnormally high levels in the years leading up to the subprime crisis in the US indicative of excessive risk-taking behaviour.

Keywords: Bank efficiency; Directional distance function; Risk; Shadow prices; US banks (search for similar items in EconPapers)
JEL-codes: C61 D24 G21 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10479-018-2886-z

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