Efficiency and Risk-taking in Pre-crisis Investment Banks

Radić, Nemanja and Fiordelisi, Franco and Girardone, Claudia (2011) Efficiency and Risk-taking in Pre-crisis Investment Banks. Centre for EMEA Banking, Finance and Economics Working Paper Series, 2011 (08). pp. 2-24.

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Abstract

Investment banks’ core functions expose them to a wide array of risks. This paper analyses cost and profit efficiency for a sample of investment banks for the G7 countries (Canada, France, Germany, Italy, Japan, UK and
US) and Switzerland prior to the recent financial crisis. We follow Coelli et al. (1999)’s methodology to adjust the estimated cost and profit efficiency scores for environmental influences including key banks’ risks, bank- and
industry specific factors and macroeconomic conditions. Our evidence suggests that failing to account for environmental factors can considerably bias the efficiency scores for investment banks. Specifically, bank-risk
taking factors (including liquidity and capital risk exposures) are found particularly important to accurately assess profit efficiency: i.e. profit efficiency estimates are consistently underestimated without accounting for bank risktaking. Interestingly, our evidence suggests that size matters for both cost and profit efficiency, however this does not imply that more concentrated markets are more efficient.

Item Type: Article
Uncontrolled Keywords: Centre for EMEA Banking, Finance and Economics Working Paper Series; Investment Banking; Stochastic Frontier Analysis; Efficiency; Environmental Conditions; Banking Risks
Subjects: 300 Social sciences > 330 Economics
Department: Guildhall School of Business and Law
Depositing User: David Pester
Date Deposited: 17 Apr 2015 14:49
Last Modified: 17 Apr 2015 14:49
URI: http://repository.londonmet.ac.uk/id/eprint/408

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