Efficiency and Risk Taking in European Banking

Fiordelisi, Franco; Marques-Ibanez, David; Molyneux, Philip

doi:10.2139/ssrn.1512619

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Efficiency and Risk Taking in European Banking

34 Pages Posted: 25 Nov 2009

See all articles by Franco Fiordelisi

Franco Fiordelisi

University of Essex - Essex Business School; University of Rome III, Italy

Philip Molyneux

University of Sharjah; University of Sharjah - College of Business Administration

There are 2 versions of this paper

Date Written: November 24, 2009

Abstract

The recent period of crisis in credit markets has highlighted the crucial role of bank risk taking. Our paper assesses the inter-temporal relationships among bank efficiency, capital and bank risk-taking in the EU-26 commercial banking industry between 1995 and 2007. Our results support the bad management-, moral hazard-, luck- and cost skimping hypotheses. Overall, our paper provides evidence that higher performance (enhanced efficiency) attained by banks prior to the current crisis is related to cost and revenue skimping and bad management. We also find that cost inefficiencies and lower capital levels seem to influence banks’ probability of default.

Keywords: banking risk, capital, efficiency

JEL Classification: G21, D24, C23, E44

Suggested Citation: Suggested Citation

Fiordelisi, Franco and Marques-Ibanez, David and Molyneux, Philip and Molyneux, Philip, Efficiency and Risk Taking in European Banking (November 24, 2009). Available at SSRN: https://ssrn.com/abstract=1512619 or http://dx.doi.org/10.2139/ssrn.1512619