Efficiency and Risk-Taking in Pre-Crisis Investment Banks

Journal of Financial Services Research. https://doi.org/10.1007/s10693-011-0111-1

24 Pages Posted: 27 Feb 2018 Last revised: 15 Jun 2020

See all articles by Nemanja Radic

Nemanja Radic

Cranfield University - School of Management

Franco Fiordelisi

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

Claudia Girardone

Essex Business School - University of Essex

Date Written: September 11, 2011

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 risk-taking. 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.

Keywords: Investment Banking, Stochastic Frontier Analysis, Efficiency, Environmental Conditions, Banking Risks

JEL Classification: D2, G24, G32, L25

Suggested Citation

Radic, Nemanja and Fiordelisi, Franco and Girardone, Claudia, Efficiency and Risk-Taking in Pre-Crisis Investment Banks (September 11, 2011). Journal of Financial Services Research. https://doi.org/10.1007/s10693-011-0111-1, Available at SSRN: https://ssrn.com/abstract=3125314 or http://dx.doi.org/10.2139/ssrn.3125314

Nemanja Radic (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Franco Fiordelisi

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

Claudia Girardone

Essex Business School - University of Essex ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44 1206874156 (Phone)
+44 1206873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/ebs/staff/profile.aspx?ID=1045

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