Delis, Manthos D and Iftekhar, Hasan and Tsionas, Efthymios (2012): On the estimation of the risk of financial intermediaries.
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In this paper we reconsider the formal estimation of the risk of financial intermediaries. Risk is modeled as the variability of the profit function of a representative intermediary, here a bank, as formally considered in finance theory. In turn, banking theory suggests that risk is determined simultaneously with profits and other bank- and industry-level characteristics that cannot be considered predetermined when profit-maximizing decisions of financial institutions are to be made. Thus, risk is endogenous. We estimate the new model on a panel of US banks, spanning the period 1985q1-2010q2. The findings suggest that risk was fairly stable up to 2001 and accelerated quickly thereafter and up to 2007. We also establish that the risk of the failed banks is quite higher than the industry’s average and this risk peaks one to two-years before the default date. Indices of bank risk commonly used in the literature do not capture these trends and/ or the scale of the increase in bank risk. Thus, we provide a new leading indicator, which is able to forecast future solvency problems in the banking industry.
|Item Type:||MPRA Paper|
|Original Title:||On the estimation of the risk of financial intermediaries|
|Keywords:||Estimation of risk, profit function, financial institutions, banks, endogenous risk, US banking sector|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General
C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Manthos Delis|
|Date Deposited:||01. Sep 2012 17:29|
|Last Modified:||12. Feb 2013 21:19|
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Available Versions of this Item
A new method to estimate the risk of financial intermediaries. (deposited 15. Nov 2011 16:49)
A new method to estimate the risk of financial intermediaries. (deposited 08. Mar 2012 12:53)
A new method to estimate the risk of financial intermediaries. (deposited 09. Mar 2012 12:15)
- On the estimation of the risk of financial intermediaries. (deposited 01. Sep 2012 17:29) [Currently Displayed]
- A new method to estimate the risk of financial intermediaries. (deposited 09. Mar 2012 12:15)
- A new method to estimate the risk of financial intermediaries. (deposited 08. Mar 2012 12:53)