Series: Working Papers. 1537.
Author: Miguel Sarmiento and Jorge E. Galán.
Published in: Emerging Markets Review, Volume 32, September 2017, Pages 52-73
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Abstract
This paper presents a stochastic frontier model with random inefficiency parameters which captures the influence of risk-taking on bank efficiency and distinguishes the effects among banks with different characteristics. The model is fitted to a 10-year sample of Colombian banks. Cost and profit efficiency are found to be over and underestimated, respectively, when risk measures are omitted or are not accurately modelled. Moreover, the magnitudes at which similar levels of risk affect bank efficiency vary with size and affiliation. In particular, domestic and small Colombian banks benefit more from being highly capitalised, while large and foreign banks benefit from higher exposure to credit and market risk. Holding more liquid assets is found to affect efficiency only at domestic banks. Lastly, we identify some channels that can explain these differences and provide insights for prudential regulation.