Banking Risk and Operating Efficiency Measures in the Era of IT

Abstract

On the basis that risk drivers are similar to the fundamental reasons for the establishment of e-banking (cost minimization and revenue maximization), this study examines bank risk rating drivers and the degree of e-banking in 124 Japanese financial institutions for two time periods: first period covers six years (2000-2005) of the 21st century  (as an example of a less volatile market) and second period is based upon last eight years of the 20th century (as an example of more volatile market). Using a basic risk scoring model, bank risk scores are regressed against operating efficiency measures, namely cost and revenue, which are calculated using stochastic frontier approach. The results confirm that the twenty first century is very advanced in its electronic-banking actuation. There is evidence suggesting that operating costs are lower and revenues are higher when banking services are delivered through electronic means. Therefore, the results support the argument that the riskiness of the banking industry might be reduced if focus is directed to operating efficiency and then to e-banking.