Survival of the Fittest: Contagion as a Determinant of Canadian and Australian Bank Risk

9 Pages Posted: 24 Oct 2011

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Ray Boffey

School of Finance and Business Economics; Financial Research Network (FIRN)

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics; Financial Research Network (FIRN)

Date Written: October, 23 2011

Abstract

The relative success of Australian and Canadian banks in weathering the Global Financial Crisis (GFC) has been noted by a number of commentators. Their earnings, capital levels and credit ratings have all been a source of envy for regulators of banks in Europe, America and the United Kingdom. The G-20 and the European Union have tried to identify the features of the Canadian and Australian financial systems which have underpinned this success in order to use them in shaping a revised international regulatory framework. Despite this perceived success, the impaired assets (also known as non-performing loans) of banks in both countries increased several fold over the GFC, and we investigate the determinants of this, using impaired assets as our measure of bank risk.

Previous studies in other countries have tended to focus on the impact of bank specific factors, such as size and return on equity, in explaining bank risk. Our approach involves including those traditional variables, plus Distance to Default (DD), and a novel contagion variable, which is the effect of major global bank DD on Australian and Canadian banks. Using panel data regression over the period 1999-2008, we find that various balance sheet and income statement factors are not good explanatory variables for bank risk. In contrast, the contagion variable is significant in explaining Canadian and Australian bank risk, which suggests that prudential regulators should look to specifically allocate a portion of regulatory capital to deal with contagion effects.

Keywords: Value at Risk, Distance to Default, Banks, Contagion

JEL Classification: G01, G21, G28

Suggested Citation

Allen, David Edmund and Boffey, Ray and Powell, Robert J., Survival of the Fittest: Contagion as a Determinant of Canadian and Australian Bank Risk (October, 23 2011). Available at SSRN: https://ssrn.com/abstract=1948288 or http://dx.doi.org/10.2139/ssrn.1948288

David Edmund Allen

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Ray Boffey (Contact Author)

School of Finance and Business Economics ( email )

Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics ( email )

Joondalup Campus
Perth
Joondalup 6027, WA
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
50
Abstract Views
357
PlumX Metrics