Efficiency and Risk in European Banking

39 Pages Posted: 13 Jun 2010

See all articles by Franco Fiordelisi

Franco Fiordelisi

University of Rome III - Department of Business Studies; Middlesex University - Business School

Philip Molyneux

University of Sharjah - College of Business Administration

David Marques-Ibanez

European Central Bank (ECB)

Date Written: June 8, 2010

Abstract

We analyze the impact of efficiency on bank risk. We also consider whether bank capital has an effect on this relationship. We model the inter-temporal relationships among efficiency, capital and risk for a large sample of commercial banks operating in the European Union. We find that reductions in cost and revenue efficiencies increase banks’ future risks thus supporting the bad management and efficiency version of the moral hazard hypotheses. In contrast, bank efficiency improvements contribute to shore up bank capital levels. Our findings suggest that banks lagging behind in their efficiency levels might expect higher risk and subdued capital positions in the near future.

Keywords: banking risk, capital, efficiency

JEL Classification: G21, D24, C23, E44

Suggested Citation

Fiordelisi, Franco and Molyneux, Philip and Marques-Ibanez, David, Efficiency and Risk in European Banking (June 8, 2010). ECB Working Paper No. 1211. Available at SSRN: https://ssrn.com/abstract=1618296

Franco Fiordelisi (Contact Author)

University of Rome III - Department of Business Studies ( email )

Via Silvio D'Amico 77
Via Silvio D'Amico 77
Rome, RM 00145
Italy

HOME PAGE: http://host.uniroma3.it/docenti/fiordelisi/?home

Middlesex University - Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Philip Molyneux

University of Sharjah - College of Business Administration ( email )

University City Road
Sharjah, 27272
United Arab Emirates

David Marques-Ibanez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
49 6913 44 6460 (Phone)
49 6913 44 6460 (Fax)

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