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

W.S. Leung, Nick Taylor and K.P. Evans

Journal of International Financial Markets, Institutions and Money, 2015, vol. 34, issue C, 277-293

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.

Keywords: Bank holding companies; Bank equity risk; ABX index; Funding illiquidity risk (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:34:y:2015:i:c:p:277-293

DOI: 10.1016/j.intfin.2014.11.012

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