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

January 1, 2012

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Format: Chicago

Sonali Das, and Amadou N Sy. How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Capital adequacy requirements, Financial crises, Financial institutions, Financial regulation and supervision, Nonperforming loans, Securities, Stocks

Keywords: Asia and Pacific, Banks, Bank's specialization, Basel III, Capital, Capital adequacy requirements, Capital requirement, Crisis, Europe, Liquidity, Market index, Nonperforming loans, North America, Regulation, Return on assets, Risk weighted assets, Securities, Stock return, Stocks, Tangible assets, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/036
Stock No:

WPIEA2012036
ISBN:

9781463933791
ISSN:

1018-5941

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