How do the risk taking behaviors of banks impact their profitability: An analysis of risk efficiency of Turkish banks

Abstract

One of the major determinants of bank performance is risk. In this study we combine the risk taking behavior and efficiency literature, by employing risk measures to assess performance with efficiency frontier models. Our empirical analysis extends the existing literature by examining the risk behavior of banks in different dimensions covering major risk measures such as capital adequacy ratio, short term repricing gap, and deposits ratio. The output variable for measuring performance is net profits adjusted for the cost of free capital. Our findings show that capital adequacy ratio negatively impacts adjusted profit performance. Overall, large banks and publicly held banks are more risk efficient compared to their counterparts.