Bank Profitability and Risk-Taking

Bank Profitability and Risk-Taking PDF

Author: Natalya Martynova

Publisher: International Monetary Fund

Published: 2015-11-25

Total Pages: 44

ISBN-13: 1513565818

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Traditional theory suggests that more profitable banks should have lower risk-taking incentives. Then why did many profitable banks choose to invest in untested financial instruments before the crisis, realizing significant losses? We attempt to reconcile theory and evidence. In our setup, banks are endowed with a fixed core business. They take risk by levering up to engage in risky ‘side activities’(such as market-based investments) alongside the core business. A more profitable core business allows a bank to borrow more and take side risks on a larger scale, offsetting lower incentives to take risk of given size. Consequently, more profitable banks may have higher risk-taking incentives. The framework is consistent with cross-sectional patterns of bank risk-taking in the run up to the recent financial crisis.

Bank Profitability and Risk Taking in Banks Under Low Interest Rate, Evidence from Banking Sector of Pakistan

Bank Profitability and Risk Taking in Banks Under Low Interest Rate, Evidence from Banking Sector of Pakistan PDF

Author: Zarmash

Publisher:

Published: 2019

Total Pages: 24

ISBN-13:

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The aim of the paper is to analyze the effect of low interest rate on profitability and risk-taking in Pakistani banking sector. By applying static modeling approach and using panel data we collected data from 20 Pakistani banks from 2010-2017 time span. The literature gap existed on this topic in under developing countries. We used two different models for Profitability and Risk-Taking. For Profitability we used NIM, Profit, ROA and ROE as performance proxy. We found the existence of negative relation between low interest rate and profitability which means low interest rate has bad effect on the profitability of the banks. While PCL and TCR taken as proxy for Risk-taking. We also found negative association between Short term interest rate and Risk-taking (TCR and PCL) which means that short term interest rate also effect bank risk-taking. Our study is limited to small sample size and few relevant variables. Further study can explore the underlying phenomenon by using large set of data and more sophisticated approach.

Bank Profitability and Risk-Taking Under Low Interest Rates

Bank Profitability and Risk-Taking Under Low Interest Rates PDF

Author: Jacob Antoon Bikker

Publisher:

Published: 2017

Total Pages: 41

ISBN-13:

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The aim of this paper is to investigate the impact of the unusually low interest rate environment on the soundness of the US banking sector in terms of profitability and risk-taking. Using both dynamic and static modeling approaches and various estimation techniques, we find that the low interest rate environment indeed impairs bank performance and compresses net interest margins. Nonetheless, banks have been able to maintain their overall level of profits, due to lower provisioning, which in turn may endanger financial stability. Banks did not compensate for their lower interest income by expanding operations to include trading activities with a higher risk exposure.

Bank Risk-Taking and Competition Revisited

Bank Risk-Taking and Competition Revisited PDF

Author: Mr.Gianni De Nicolo

Publisher: International Monetary Fund

Published: 2006-12-01

Total Pages: 51

ISBN-13: 1451865570

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This paper studies two new models in which banks face a non-trivial asset allocation decision. The first model (CVH) predicts a negative relationship between banks' risk of failure and concentration, indicating a trade-off between competition and stability. The second model (BDN) predicts a positive relationship, suggesting no such trade-off exists. Both models can predict a negative relationship between concentration and bank loan-to-asset ratios, and a nonmonotonic relationship between bank concentration and profitability. We explore these predictions empirically using a cross-sectional sample of about 2,500 U.S. banks in 2003 and a panel data set of about 2,600 banks in 134 nonindustrialized countries for 1993-2004. In both these samples, we find that banks' probability of failure is positively and significantly related to concentration, loan-to-asset ratios are negatively and significantly related to concentration, and bank profits are positively and significantly related to concentration. Thus, the risk predictions of the CVH model are rejected, those of the BDN model are not, there is no trade-off between bank competition and stability, and bank competition fosters the willingness of banks to lend.

Bank Profitability and Financial Stability

Bank Profitability and Financial Stability PDF

Author: Ms.TengTeng Xu

Publisher: International Monetary Fund

Published: 2019-01-11

Total Pages: 54

ISBN-13: 1484393805

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We analyze how bank profitability impacts financial stability from both theoretical and empirical perspectives. We first develop a theoretical model of the relationship between bank profitability and financial stability by exploring the role of non-interest income and retail-oriented business models. We then conduct panel regression analysis to examine the empirical determinants of bank risks and profitability, and how the level and the source of bank profitability affect risks for 431 publicly traded banks (U.S., advanced Europe, and GSIBs) from 2004 to 2017. Results reveal that profitability is negatively associated with both a bank’s contribution to systemic risk and its idiosyncratic risk, and an over-reliance on non-interest income, wholesale funding and leverage is associated with higher risks. Low competition is associated with low idiosyncratic risk but a high contribution to systemic risk. Lastly, the problem loans ratio and the cost-to-income ratio are found to be key factors that influence bank profitability. The paper’s findings suggest that policy makers should strive to better understand the source of bank profitability, especially where there is an over-reliance on market-based non-interest income, leverage, and wholesale funding.

Bank Profitability, Leverage Constraints, and Risk-taking

Bank Profitability, Leverage Constraints, and Risk-taking PDF

Author: Natalya Martynova

Publisher:

Published: 2019

Total Pages: 0

ISBN-13: 9783957295965

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Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model's predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis

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