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A Decade of Australian Banking Risk: Evidence from Share Prices


  • Marianne Gizycki

    (Reserve Bank of Australia)

  • Mark Levonian

    (Federal Reserve Bank of San Francisco)


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.

Suggested Citation

  • Marianne Gizycki & Mark Levonian, 1993. "A Decade of Australian Banking Risk: Evidence from Share Prices," RBA Research Discussion Papers rdp9302, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9302

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    References listed on IDEAS

    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. 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 449-470, May.
    3. 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 257-276, June.
    4. Philip Lowe & Thomas Rohling, 1992. "Loan Rate Stickiness: Theory and Evidence," RBA Research Discussion Papers rdp9206, Reserve Bank of Australia.
    5. 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.).
    6. 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 446-460, November.
    7. 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 871-895, September.
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    Cited by:

    1. Loveland, Robert, 2016. "How prompt was regulatory corrective action during the financial crisis?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 16-36.

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