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Efficiency versus risk in large domestic US banks

Linbo Fan (Lipper Inc., 1380 Lawrence St., Suite 950, Denver, CO 80204)
Sherrill Shaffer (Department of Economics and Finance, University of Wyoming, Laramie, WY 82071‐3985)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 September 2004



This paper studies the profit efficiency of a sample of large U.S. commercial banks and explores how this performance varies with selected measures of bank risk reflecting aspects of credit risk, liquidity risk, and insolvency risk. We use a standard profit function and the stochastic frontier approach, and compare two standard functional forms – Cobb‐Douglas and translog – to assess the tradeoff between precision and parsimony. We find that profit efficiency is sensitive to credit risk and insolvency risk but not to liquidity risk or to the mix of loan products.



Fan, L. and Shaffer, S. (2004), "Efficiency versus risk in large domestic US banks", Managerial Finance, Vol. 30 No. 9, pp. 1-19.



Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited

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