A Decade of Australian Banking Risk: Evidence from Share Prices
The stability of the banking sector has long been a matter of concern for public policy. The likelihood of bank failure depends on two factors: (i) the variability of bank income (which primarily reflects the variability of the rate of return on bank assets), and (ii) the capacity of a bank to absorb losses in the short run (which depends on bank capital). Accounting measures of the volatility of the rate of return on bank assets and bank capital ratios may not reflect the appropriate economic concepts. In this paper, we use share price data to calculate the economic values of Australian bank asset volatilities, capital ratios and the potential public sector liability which might arise as a result of claims by depositors of a failed bank. The public sector liability is found to be extremely small. We find that the estimated capital ratio for the Australian banking sector has risen over the past decade, while there has been no noticeable increase in the riskiness of banks. A preliminary investigation of the relation between asset volatility and bank capital is conducted which suggests that riskier banks do tend to maintain higher capital ratios, and that there is a positive relation between the two variables across time.
|Date of creation:||Mar 1993|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence R. Cordell & Kathleen Kuester King, 1992. "A market evaluation of the risk-based capital standards for the U.S. financial system," Finance and Economics Discussion Series 189, Board of Governors of the Federal Reserve System (U.S.).
- Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
- Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-60, November.
- Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-95, September.
- Ben S. Bernanke, 1983.
"Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression,"
NBER Working Papers
1054, National Bureau of Economic Research, Inc.
- Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp9302. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew)
If references are entirely missing, you can add them using this form.