The Fluctuating Default Risk of Australian Banks

Posted: 3 Aug 2012

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

Robert J. Powell

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

Date Written: March 8, 2012

Abstract

Australian banks are widely considered to have fared far better during the Global Financial Crisis than their global counterparts, continuing to display solid earnings, good capitalization and strong credit ratings. Nonetheless, Australian banks experienced significant deterioration in the market values of assets. We use the KMV/Merton structural methodology, which incorporates market asset values, to examine default probabilities of Australian banks, making extensive international comparisons. We also modify the model to incorporate conditional probability of default, which measures extreme credit risk. We find that, during the Global Financial Crisis, based on extreme asset value fluctuations, Australian bank default probabilities fare only slightly better than their global counterparts.

Keywords: Banks, credit risk, default, financial crisis

JEL Classification: G01, G21, G28

Suggested Citation

Allen, David Edmund and Powell, Robert J., The Fluctuating Default Risk of Australian Banks (March 8, 2012). Australian Journal of Management, Vol. 37, No. 2, 2012. Available at SSRN: https://ssrn.com/abstract=2122548

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

Robert J. Powell (Contact Author)

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

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