NDLI: Estimation of banking technology under credit uncertainty

Content Provider	Springer Nature Link
Author	Malikov, Emir Restrepo Tobón, Diego Kumbhakar, Subal C.
Copyright Year	2014
Abstract	Credit risk is crucial to understanding banks’ production technology and should be explicitly accounted for when modeling the latter. The banking literature has largely accounted for risk using ex-post realizations of banks’ uncertain outputs and the variables intended to capture risk. This is equivalent to estimating an ex-post realization of bank’s production technology which, however, may not reflect optimality conditions that banks seek to satisfy under uncertainty. The ex-post estimates of technology are likely to be biased and inconsistent, and one thus may call into question the reliability of the results regarding banks’ technological characteristics broadly reported in the literature. However, the extent to which these concerns are relevant for policy analysis is an empirical question. In this paper, we offer an alternative methodology to estimate banks’ production technology based on the ex-ante cost function. We model credit uncertainty explicitly by recognizing that bank managers minimize costs subject to given expected outputs and credit risk. We estimate unobservable expected outputs and associated credit risk levels from banks’ supply functions via nonparametric kernel methods. We apply this framework to estimate production technology of U.S. commercial banks during the period from 2001 to 2010 and contrast the new estimates with those based on the ex-post models widely employed in the literature.
Starting Page	185
Ending Page	211
Page Count	27
File Format	PDF
ISSN	03777332
Journal	Empirical Economics
Volume Number	49
Issue Number	1
e-ISSN	14358921
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2014-07-27
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Ex-ante cost function Production uncertainty Productivity Returns to scale Risk Econometrics Statistics for Business/Economics/Mathematical Finance/Insurance Economic Theory
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Social Sciences Economics and Econometrics

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1	Ministry of Education (GoI), Department of Higher Education	Sanctioning Authority	https://www.education.gov.in/ict-initiatives
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3	National Digital Library of India Office, Indian Institute of Technology Kharagpur	The administrative and infrastructural headquarters of the project	Dr. B. Sutradhar bsutra@ndl.gov.in
4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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