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Radić, Nemanja; Fiordelisi, Franco; Girardone, Claudia (2011)
Publisher: Centre for EMEA Banking, Finance and Economics, London Metropolitan University
Languages: English
Types: Article
Subjects: HJ, dewey330, HG
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\ud 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\ud 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\ud 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 risktaking. 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.
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