How Risky are Banks' Risk Weighted Assets? Evidence from the Financial Crisis
40 Pages Posted: 2 Feb 2012
Date Written: January 2012
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
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