Integrating bank profit and risk-avoidance decisions for selected European countries: A micro-macro analysis

摘要

A two-equation integrated model is developed to capture bank profit and risk-avoidance decisions. Output is limited to customer loans. The profit function is based on output and selected inputs. Risk-avoidance (using the capitalization ratio) depends on micro and micro*macro interactive variables. The SUR method is used to test the hypothesis that the two functions are interdependent. Also, a single reduced-form equation is derived from the SUR model to analyze the volatility of the capitalization ratio. Five European countries and their banks for the period 1991-2001 are used to run the regressions and to test the hypothesis. The individual statistical results were generally consistent with similar results found in the literature. The Breusch-Pagan test of independence was rejected. A key finding from the volatility analysis suggests that bank profit rates are inversely related to the volatility of the banks' capitalization ratios as measured by their variances.