How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis

Author/Editor:

Miss Sonali Das ; Amadou N Sy

Publication Date:

January 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2012/036

Subject:

Banking Capital adequacy requirements Financial crises Financial institutions Financial regulation and supervision Nonperforming loans Securities Stocks

English

Publication Date:

January 1, 2012

ISBN/ISSN:

9781463933791/1018-5941

Stock No:

WPIEA2012036

Pages:

38

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