Risk-return Portfolio Level Trade-off for Czech Banks
Risk-return Portfolio Level Trade-off for Czech Banks

Summary/Abstract: This paper examines the validity of the risk-return trade-off for a sample of Czech banks overthe period 2002–2022 by analysing the relationship between the bank risk and risk-adjustedreturns. I find evidence of a significant negative association between the regulatory risk measureand risk-adjusted returns, indicating that the risk-return trade-off does not hold. Specifically,a 100 bps increase in the risk is associated with about a 7 bps decrease in the return on riskadjustedassets (RORWA) and an 11 bps decrease in the risk-adjusted net interest margin (rNIM)in the short run. The long-run effect is about double for RORWA and almost triple for rNIM.I also find evidence that during the period of low interest rates, the effect for RORWA wasabout a half smaller, albeit still negative. On the contrary, when non-regulatory measures of riskor risk-adjusted profitability are used, the risk-return trade-off seems to hold.

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