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wp1236

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Published by Kostas Georgioy

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Published by: Kostas Georgioy on Jan 31, 2012
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How Risky Are Banks’ Risk Weighted Assets?Evidence from the Financial CrisisSonali Das and Amadou N.R. Sy
WP/12/36
 
 
© 201
2
International Monetary Fund WP/
12/36
 
IMF Working Paper
Monetary and Capital Markets Department
How Risky Are Banks’ Risk Weighted Assets? Evidence from the Financial CrisisPrepared by Sonali Das and Amadou
N
.R. Sy
1
 
Authorized for distribution by Ceyla Pazarbasioglu

201
 
Abstract
We study how investors account for the riskiness of banks’ risk-weighted assets (RWA) byexamining the determinants of stock returns and market measures of risk. We find that bankswith lower RWA performed better during the US and European crises. This relationship isweaker 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 thereis evidence of a positive relationship before the US crisis which becomes negativeafterwards.JEL Classification Numbers: G20, G21, G28Keywords: Banks, capital, crisis, liquidity, regulation, risk weighted assets, Basel IIIAuthor’s E-Mail Address: ssd36@cornell.edu; asy@imf.org 
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Cornell University and International Monetary Fund, respectively. We are grateful for comments from BertrandCandelon, Vanessa Le Leslé, Ceyla Pazarbasioglu, Aditya Narain, Noel Sacasa, and participants at an IMFseminar.
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 necessarilyrepresent those of the IMF or IMF policy. Working Papers describe research in progress by theauthor(s) and are published to elicit comments and to further debate.
 
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Contents Page
ABSTRACT ......................................................................................................................................... 1
 
I. INTRODUCTION ............................................................................................................................ 3
 
II. STYLIZED FACTS ........................................................................................................................... 5
 
III. RISK WEIGHTED ASSETS: BASEL II AND STANDARDIZED AND IRB APPROACHES ........... 6
 
IV. REVIEW OF LITERATURE ............................................................................................................ 7
 
V. DATA AND METHODOLOGY ...................................................................................................... 9
 
Market measures of risk 
................................................................................................................................... 12
 
VI. ESTIMATION RESULTS ............................................................................................................. 12
 
Determinants of stock returns
......................................................................................................................... 12
 
Market Measures of Risk and Balance-Sheet Measures of Risk Exposure
......................................... 15
 
VII. CONCLUSIONS ......................................................................................................................... 16
 
TABLES ............................................................................................................................................. 19
 
APPENDIX TABLES ......................................................................................................................... 36
 

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