Measuring Excessive Risk-Taking in Banking

Jiri Podpiera and Laurent Weill

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: In this paper we propose a new approach to the assessment of excessive risk-taking by a banking sector. We use the portfolio approach to assess the optimal risk-return combination of a bank’s portfolio, based on data for 32 categories of loans. It provides a benchmark for the optimality of the bank’s portfolio. We apply this method on an exhaustive sample of Czech banks for the period January 2005–-February 2008. We observe an average excess of risk-taking of 33% of the optimal risk (excessive risk-taking thus measures the percentage reduction in the risk of the portfolio that the banking sector could have exhibited had the portfolio been efficient) and a reduction of this excess risk over the analysed period.

Keywords: Bank; financial stability; risk-taking; transition countries. (search for similar items in EconPapers)
JEL-codes: G G21 P20 (search for similar items in EconPapers)
Date: 2009-09
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Measuring Excessive Risk-Taking in Banking (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2009/3

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