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How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis
Author: Miss Sonali Das and Mr. Amadou N Sy
Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 036
Language:
English
Publication Date:
01 Jan 2012
DOI:
https://doi.org/10.5089/9781463933791.001
ISBN:
9781463933791
ISSN:
1018-5941
Pages:
38
Keywords:
WP; stock return; return on assets; capital requirement; bank's specialization; market index; Banks; capital; crisis; liquidity; regulation; risk weighted assets; Basel III; tangible assets; Stocks; Capital adequacy requirements; Securities; Nonperforming loans; Europe; Asia and Pacific; North America
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund