Abstract
Following recent models using equity returns to proxy for credit ratings, the article examines evidence of agency problems in banks of Germany, Mexico, Thailand, and Turkey. The paper uses the RAROC (Risk-Adjusted Rate of Return) method to identify optimal bank portfolios during the sample period. We find that banks in Mexico, Turkey and Thailand would have chosen portfolios with less risk and higher returns using this method than the portfolios they actually chose, suggesting agency problems. The hypothesis of efficient, RAROC-consistent portfolio choice by German banks, on the other hand, cannot be rejected.
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