Which Banks Are More Risky?
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Which Banks Are More Risky?

The Impact of Loan Growth and Business Model on Bank Risk-Taking

Matthias Köhler
Deutsche Bundesbank, 2012
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Matthias Köhler, an economist at the Deutsche Bundesbank, observes that even though recent economic crises have affected the entire banking industry in the European Union, these crises haven’t affected every EU bank in the same way. With all the chaos that the crises caused the industry, Köhler says prudent banks should analyze their models and shift to profit-making schemes with more stability and less risk. Köhler canvasses a large sample of banks and their transactions, changing his analytical formulas to include a broader range of variables and relationships. His approach doesn’t reveal anything too surprising, but it does contradict some commonly held axioms about banks, their funding and their business models. Köhler writes more clearly and accessibly than most other economists, although his report is understandably replete with econometric formulas, statistical regressions and mathematical modeling. getAbstract recommends his study to bank executives, economists and risk professionals in the European Union and elsewhere.

Summary

Big Profit, Big Risk

The financial crisis of 2008 affected all types of banks within the European Union (EU), but the impact on each institution differed according to a number of variables. In particular, relative levels of loan growth and specific banks’ business models had varying effects on their profitability and even their viability during and after the crisis.

“Large-complex banking groups” that concentrate on investment banking showed the greatest losses. Similarly, banks where the loan-growth rate rose in the run-up to the crisis experienced worse returns than banks with more tempered lending activities. Banks with lower levels of loan growth had greater returns on equity in 2009 – just after the worst of the fall of 2008 crisis – than did banks with more elevated lending rates.

Banks that lent a great deal prior to the crisis ran greater risks than banks with more moderate loan growth, but the top lenders also made higher profits until 2008. Their profitability shrank in following years as the crisis gave way to an extended economic slump that raised the number and impact of nonperforming loans. Likewise, big banks that pursued non-interest income in...

About the Author

Matthias Köhler conducts research on financial stability and banking structure at the Deutsche Bundesbank.

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