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Bank risks and the business cycle





  • L. BAELE


This paper investigates the return/risk behavior of European banks in the economic downturn of 2000-2003 in order to investigate the sources of bank resilience during the economic slowdown. We identify banks with different strategies and different characteristics before the slowdown and investigate their risk profile before and during the downturn with market-based measures such as the Q-ratio, the Sharpe ratio and the betas for relevant risk exposures. We find that bank returns and risks differ across countries and institutional types. Diversified banks were hit harder than their specialized peers. Banks with a focus on local lending and banks with relatively high interest margins seem to have benefited from that focus. Banks with higher levels of capital are not only viewed by the stock market as less risky, they also produce superior returns during a downturn. This underscores the importance of Basle-type capital adequacy rules for the systemic stability of the banking system. Finally, we find that neither size nor hedging offer a structural protection against adverse economic conditions.

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Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 04/264.

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Length: 35 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:rug:rugwps:04/264
Contact details of provider: Postal: Hoveniersberg 4, B-9000 Gent
Phone: ++ 32 (0) 9 264 34 61
Fax: ++ 32 (0) 9 264 35 92
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  28. L. Baele & R. Vander Vennet & A. Van Landschoot, 2004. "Bank Risk Strategies and Cyclical Variation in Bank Stock Returns," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 04/217, Ghent University, Faculty of Economics and Business Administration.
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  30. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-82, October.
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