Measuring Excessive Risk-Taking in Banking
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.
JEL Codes: G21, G 28, P20
Keywords: Bank, financial stability, risk-taking, transition countries
Issued: September 2009
Download: CNB WP No. 3/2009 (pdf, 282 kB)
Published as: Podpiera, J. and Weill, L. (2010): Measuring Excessive Risk-Taking in Banking. Czech Journal of Economics and Finance, 60(4), 294-306