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Journal of Financial Services Research

, Volume 41, Issue 1–2, pp 81–101 | Cite as

Efficiency and Risk-Taking in Pre-Crisis Investment Banks

  • Nemanja Radić
  • Franco Fiordelisi
  • Claudia Girardone
Article

Abstract

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 US) and Switzerland prior to the recent financial crisis. We follow Coelli et al. (J Prod Anal 11:251–273, 1999)’s methodology to adjust the estimated cost and profit efficiency scores for environmental influences including key banks’ risks, bank- and 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-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 risk-taking. 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.

Keywords

Investment banking Stochastic frontier analysis Efficiency Environmental conditions Banking risks 

JEL classification

D2 G24 G32 L25 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Nemanja Radić
    • 1
  • Franco Fiordelisi
    • 2
  • Claudia Girardone
    • 3
  1. 1.Centre for EMEA Banking, Finance and Economics, London Metropolitan Business SchoolLondon Metropolitan UniversityLondonUK
  2. 2.University of Rome IIIRomeItaly
  3. 3.University of EssexColchesterUK

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