Standard banking theory suggests that there exists an optimal level of credit risk that yields maximum bank profit. We identify the optimal level of risk-weighted assets that maximizes banks’ returns in the full sample of US banks over the period 1996–2011. We find that this optimal level is cyclical for the average bank, being higher than the realized credit risk in relatively stable periods w...

We calculate abnormal stock returns for Japanese non-financial companies around major events associated with the banking crisis (1995–2000), and find that not all companies were equally sensitive to the malaise of the banking sector: the most affected were small, leveraged, low-tech companies with low credit ratings and low market to book ratios. This is consistent with ‘‘credit crunch’’ theori...

We examine the effect of house price appreciation on bank loan portfolios during the 1996—2006 period. While most previous research in this area has concentrated on loan demand effects, we evaluate how house prices affect a bank’s credit supply. Controlling for possible simultaneity between house prices and bank loan portfolio growth, we find that banks affected by greater house price appreciat...

This paper utilises the non-parametric frontier approach, DEA, to analyse the technical and scale efficiency in Japanese banking using a recent cross –section sample. Efficiency analysis is conducted across individual banks, bank types and bank size groups. Following Berger and Humphrey (1997), problem loans are controlled for as an exogenous influence on bank efficiency. Powerful size-efficien...

Article history: Received 30 May 2011 Received in revised form 7 November 2011 Accepted 20 December 2011 Available online 29 December 2011 We investigate bank risk taking, efficiency and their relation to law enforcement using a unique sample of 133 Chinese city commercial banks across 31 regions for the 1999–2008 period. We find that stronger law enforcement tends to promote greater bank risk ...

A model of a dependent central bank that internalizes the government’s budget constraint is used to examine the optimal composition of the euro zone. The model embodies the desire to stimulate output and to provide monetary financing to governments. Unable to pre-commit to first-best policies, the central bank produces excess inflation — a tendency partially reduced in a monetary union. On the ...

I study the optimal architecture of bank supervision in a federal system. A central supervisor gets information about a bank, for instance through stress-testing, and decides whether an on-site examination should be performed by a local or a central authority. Local supervisors have lower inspection costs, but do not internalize crossborder externalities. The optimal degree of centralization de...

Since the fiduciary duty of bank management is to maximize bank value and not social welfare, we analytically solve for the liability structure that maximizes the value of a bank leveraged by deposits and subordinated debt. Our analysis offers a perspective on privately-rational bank capital structure and its interaction with regulatory environment. Absent deposit insurance and regulatory closu...