Optimal versus realized bank credit risk and monetary policy

Manthos Delis () and Yiannis Karavias

Discussion Papers from University of Nottingham, Granger Centre for Time Series Econometrics

Abstract: Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical, being higher than the realized credit risk in relatively stable periods with high profit opportunities for banks but quickly decreasing below the realized in periods of turmoil. We place this cyclicality into the nexus between bank risk and monetary policy. We show that a contractionary monetary policy in stable periods, where the optimal credit risk is higher than the realized credit risk, increases the gap between them. An increase in this gap also comes as a result of an expansionary monetary policy in bad economic periods, where the realized risk is higher than the optimal risk.

Keywords: Banks; Optimal credit risk; Profit maximization; Monetary policy (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-ban, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.nottingham.ac.uk/research/groups/grangercentre/documents/13-03.pdf (application/pdf)

Related works:
Journal Article: Optimal versus realized bank credit risk and monetary policy (2015)
Working Paper: Optimal versus realized bank credit risk and monetary policy (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:not:notgts:13/03

Access Statistics for this paper

More papers in Discussion Papers from University of Nottingham, Granger Centre for Time Series Econometrics School of Economics University of Nottingham University Park Nottingham NG7 2RD. Contact information at EDIRC.
Bibliographic data for series maintained by ().