Efficiency and Risk in European Banking

By Franco Fiordelisi, David Marqués-Ibáñez, Phil Molyneux. Social Science Research Network, 2011

750 citations recorded by the source corpus.

We assess the inter-temporal relationship between bank efficiency, capital and risk in a sample of European commercial banks employing several definitions of efficiency, risk and capital and using the Granger-causality methodology in a panel data framework. Our results suggest that lower bank efficiency with respect to costs and revenues Granger-causes higher bank risk and that increases in bank capital precede cost efficiency improvements. We also find that more efficient banks eventually become better capitalized and that higher capital levels tend to have a positive effect on efficiency levels. These results are generally confirmed by a series of robustness tests. The results have potentially important implications for bank prudential supervision and underline the importance of attaining long-term efficiency gains to support financial stability objectives.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/1ae1560f930557c31e21f408f1288ef158f36a81

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Finance

Citations in the corpus

Ownership, bank size, capitalization and bank performance: Evidence from India (2020, neutral): “Analyzing, European data, De Jonghe (2010) and Fiordelisi et al. (2011) find that revenue diversification increases banks’ risk.”
Market concentration, risk-taking, and bank performance: evidence from emerging economies (2013, background): “While Altunbas et al. (2007) find no such a negative association as in the US market, Fiordelisi et al. (2011) provide evidence that banks with a lower level of capital risk are more efficient.”
National culture and bank risk-taking (2017, neutral): “We follow Ahern et al. (2015), Anginer et al. (2014), Fiordelisi et al. (2011), La Porta et al. (1997) and Li et al. (2013) in choosing the relevant country variables (e.g., GDP per capita, GDP growth volatility, Domestic credit as a percentage of GDP, Legal origin).”
Bank risk and performance in the MENA region: The importance of capital requirements (2016, neutral): “Fiordelisi et al. (2011) explain that lower returns induce bank owners to choose a higher point on the efficiency frontier to improve their profits.”
Market power, revenue diversification and bank stability: Evidence from selected South Asian countries (2012, methodology): “Moreover, the GMM estimator is more efficient than the 2SLS method because it accounts for heteroskedasticity and is robust to the distribution of errors (Fiordelisi et al., 2011).”
Comparative credit risk in Islamic and conventional bank (2015, neutral): “Lastly, a number of researchers have used a simple NPL ratio as a proxy for credit risk in banking (Berger and DeYoung, 1997; Ahmad and Ariff, 2007; Das and Ghosh, 2007; Jiménez et al., 2010; Fiordelisi et al., 2011).”
Factors influencing bank risk in Europe: Evidence from the financial crisis (2015, result): “6 Other authors, focusing either on cost efficiency (Berger and De Young, 1997; Williams, 2004) or on profit or revenue efficiency (Berger and Bonaccorsi di Patti, 2006; Fiordelisi et al., 2011), report similar findings.”