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How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis

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  • Sonali Das
  • Amadou N. R. Sy

Abstract

We study how investors account for the riskiness of banks'' risk-weighted assets (RWA) by examining the determinants of stock returns and market measures of risk. We find that banks with higher RWA had lower stock returns over the US and European crises. This relationship is weaker in Europe where banks can use Basel II internal risk models. For large banks, investors paid less attention to RWA and rewarded instead lower wholesale funding and better asset quality. RWA do not, in general, predict market measures of risk although there is evidence of a positive relationship before the US crisis which becomes negative afterwards.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/36.

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Length: 38
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/36

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Related research

Keywords: Banks; Capital; Liquidity; Asset management; Bank supervision; Credit risk; Global Financial Crisis 2008-2009; Stock prices; banking; return on assets; dummy variables; standard errors; independent variables; bank risk; standard deviation; tier 1 capital; statistics; descriptive statistics; deposit insurance; capital adequacy; bank capital; probability; bank holding companies; tier 2 capital; bank stock; bank risk-taking; bank holding; dummy variable; banking regulation; basel accord; federal deposit insurance; retained earnings; capital requirement; subordinated debt; samples; simultaneous equations; banking supervision; bank activity; banking sector; banking industry; correlations; bank risk taking; income statement; probability of default; banks with assets; bank regulators; bank run; capital adequacy ratio; bank governance; nonlinear relationship; banks ? assets; equations; balance sheet growth; bank profitability; outliers; bank size; bank portfolio;

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Cited by:
  1. David G. Mayes & Hanno Stremmel, 2014. "The Effectiveness of Capital Adequacy Measures in Predicting Bank Distress," SUERF Studies, SUERF - The European Money and Finance Forum, number 2014/1.
  2. Kapan, Tümer & Minoiu, Camelia, 2013. "Balance sheet strength and bank lending during the global financial crisis," Discussion Papers 33/2013, Deutsche Bundesbank, Research Centre.
  3. Matthew Schurin, 2012. "Optimal Fiscal Policy and the Banking Sector," Working papers 2012-40, University of Connecticut, Department of Economics, revised Jul 2013.
  4. Chan-Lau, Jorge A. & Liu, Estelle X. & Schmittmann, Jochen M., 2013. "Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis," Discussion Papers 32/2013, Deutsche Bundesbank, Research Centre.

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