The determinants of bank risks: evidence from the recent financial crisis

Leung, W. S. ORCID: https://orcid.org/0000-0002-0389-2126, Taylor, N. and Evans, K. P. ORCID: https://orcid.org/0000-0001-8854-2629 2015. The determinants of bank risks: evidence from the recent financial crisis. Journal of International Financial Markets, Institutions and Money 34 , pp. 277-293. 10.1016/j.intfin.2014.11.012

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Abstract

We investigate whether US bank holding company fundamental characteristics are related to bank risk over a period that covers the recent 2007-09 financial crisis. We extend prior studies to consider bank equity risk exposure to market-wide default risk, the structured finance market, and the asset-backed money market in a variance decomposition. Four important results emerge: (1) the risk in bank opaque assets is not accurately priced; (2) banks with lower earnings have higher risk; (3) a positive relationship between non-performing loans and bank risk increased threefold during the crisis and (4) banks with a larger buffer of Tier 1 capital have lower risk and lower exposure to shocks in market-wide default risk and the structured finance market in particular. These results highlight the importance to investors of studying fundamentals, while from a bank regulatory perspective, effective management of regulatory capital may manage risks arising from contagion stemming from structured finance markets and funding illiquidity.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HG Finance
Uncontrolled Keywords:	Bank holding companies; Bank equity risk; ABX index; Funding illiquidity risk.
Publisher:	Elsevier
ISSN:	1042-4431
Date of Acceptance:	14 November 2014
Last Modified:	18 Nov 2024 22:00
URI:	https://orca.cardiff.ac.uk/id/eprint/67563

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