Risk perception, profit efficiency in commercial banking : multicountry empirical evidence over 2000-2013

Emmerton, Monika

Economics; Business
July 2017

Thesis or dissertation

© 2017 Monika Emmerton. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

This thesis aims to evaluate and discuss two important aspects of commercial banks performance, implicitly underlying the process of profit generation and its sustainability. Namely, behaviour towards risk, based on data from the UK, the U.S., Japan and profit efficiency, based on data from the UK, the U.S., Japan and Switzerland. In addressing those issues, I used a relatively large data set covering 13 years, divided by the pre-crisis (2000-2006), the financial crisis (2007-2009) and the post-crisis (2010-2013) intervals.

Contrary to the neoclassical perspective on risk taking behaviour commonly applied in economics, my research in chapter three introduces an alternative approach - the propositions of Prospect Theory (PT) (Kahneman & Tversky, 1979). In line with PT, Bank’s choices under risk and uncertainty are seen as a result involving subjective judgement, sensitive to the way the problem of choice is framed relatively to a performance target, labelled as a status quo. Examination of risk behaviour in the context of PT did not find the significant recognition by previous researchers within commercial banking, therefore the current work aims to fill that identified gap.

My next important contribution is in chapter four. There, I established new empirical evidence on profit efficiency. The research incorporates variables not considered before by the literature on profit efficiency in commercial banking, like bank assets liquidity and a consumer confidence index.

Overall results indicate that subjectivity bias was an important element of commercial bank risk’s behaviour in pre-crisis. As consistent with the predictions of PT I have found evidence for the presence of non-constant risk preferences.

The findings on profit efficiency analysis show that all analysed commercial banks over the crisis period experienced a considerable drop in their ability to generate profits efficiently. Rise of bank assets illiquidity was the most important, significant driver of profit inefficiency over all of the analysed periods. Consumer positive expectations to the state of the economy contributed to improvement of bank profit efficiency. Negative association between market concentration and profit efficiency levels for the pre-crisis period confirms banks’ discretion in profit efficiency maximization.

Business School, The University of Hull
Pérez-Sebastián, Fidel; Amorosi, Gabriele
Sponsor (Organisation)
University of Hull
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Qualification name
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