How Risky are Banks' Risk Weighted Assets? Evidence from the Financial Crisis

40 Pages Posted: 2 Feb 2012

See all articles by Sonali Das

Sonali Das

International Monetary Fund (IMF)

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department; Brookings Institution

Date Written: January 2012

Abstract

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.

Keywords: Banks, Capital, Liquidity, Asset management, Bank supervision, Credit risk, Global Financial Crisis 2008-2009, Stock prices, banking, return on assets, dummy variables, standard errors, independent variables, bank risk, standard deviation

JEL Classification: G20, G21, G28

Suggested Citation

Das, Sonali and Sy, Amadou Nicolas Racine, How Risky are Banks' Risk Weighted Assets? Evidence from the Financial Crisis (January 2012). IMF Working Paper No. 12/36, Available at SSRN: https://ssrn.com/abstract=1997749

Sonali Das

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Amadou Nicolas Racine Sy

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Room 9-548
Washington, DC 20431
United States
202-623-8651 (Phone)
202-589-8561 (Fax)

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

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