## _wp1236 - APPENDIX TABLES

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### I. Introduction — framing and research questions
- Key policy context:
  - Basel II sets risk-weighted capital requirement of at least 8 percent of RWA; Basel III emphasizes higher quality capital and proposes a complementary non-risk-weighted leverage ratio.
- Core questions:
  - Did banks with lower risk-weighted assets (RWA) have higher stock returns during the 2007–2008 crisis?
  - Do market-based measures of bank risk correspond to reported RWA?
- Hypotheses:
  - (H1) Banks with lower RWA will perform better during the crisis.
  - (H2) Banks with higher capital ratios will have higher stock returns during the crisis and banks with more stable funding will have higher stock returns during the crisis.
  - (H2-A) Banks with more stable funding will not receive as high a reward for higher capital, compared to banks with less stable funding.
  - (H3) Market measures of bank risk will be positively correlated with RWA.
  - (H3-A) This relationship may change after the financial crisis.

### II. Stylized facts (observed trends)
- Long-run trends:
  - Decline in RWA/Tangible Assets since late 1990s.
  - Decline in quality of regulatory capital (Total Capital/RWA, Tier1 Capital/RWA, TCE/RWA) since late 1990s.
- Regional differences:
  - European banks have on average much lower RWA as a share of total assets than banks in North America or Asia.
- Definitions and notes:
  - Total regulatory capital = Tier 1 capital + Tier 2 capital.
  - Tangible common equity (TCE) = common equity minus intangibles and goodwill.

### III. RWA: Basel II conceptual framework and measurement
- Basel I: simple buckets for sovereigns, banks, mortgages, corporates.
- Basel II features:
  - Introduced value-at-risk (VaR) for market risk and extended model-based approaches to credit risk.
  - Standardized Approach (SA): risk weights vary by external CRA ratings; home mortgages risk weight reduced from 50 to 35 percent relative to Basel I.
  - Internal Ratings-Based (IRB) approach built on three parameters: (i) PD (probability of default), (ii) EAD (exposure at default), (iii) LGD (loss given default).
  - Expected loss (EL) = PD x EAD x LGD; in percentage of EAD, EL = PD x LGD.
  - Capital requirement (K) set using a Merton model depending on PD and LGD.
  - RWA = 12.5 x K x EAD.
- Important caveat:
  - Under advanced IRB, banks have considerable discretion in reporting PD, EAD, and LGD.

### IV. Data, sample, and empirical strategy
- Sample and data:
  - 808 publicly-listed deposit-taking institutions in 35 countries.
  - Balance-sheet and income statement data: Bankscope. Stock return data: Datastream.
  - Outliers removed at 1 percent and 99 percent levels.
- Crisis-period stock return statistics:
  - Average bank stock return from June 30, 2007 to September 30, 2008 = -31 percent (standard deviation 27 percent).
  - Stock return during Eurozone debt crisis (June 30, 2011 to September 30, 2011) = -13 percent (standard deviation 20 percent).
- Main explanatory variables:
  - RWA scaled by tangible assets (RWA/TA).
  - Capital measures: tangible common equity (TCE), Tier 1 regulatory capital, total regulatory capital. TCE used in main analysis.
  - Funding stability = share of customer deposits in total deposits and short-term funding (equal to 100 – x where x is the funding fragility measure of Demirgüç-Kunt and Huizinga (2009)).
  - Securities/Assets (proxy for asset liquidity); NPL/Loans; ROAA; log(Assets); country fixed effects; bank specialization dummies.
- Estimation models:
  - Model (1) cross-section (LSDV with country fixed effects) for real stock returns in US dollars over June 30, 2007 to September 30, 2008; explanatory variables lagged one year.
  - Model (2) panel (2004–2010) for market measures of risk (stock return volatility, CAPM beta, idiosyncratic volatility) including (TCE/TA)^2.

### V. Key descriptive statistics (selected)
- Table 1. Stock returns over crisis periods (observations given):
  - June 2007 to Sep 2008 (770 obs): Mean -31.37; Std. Dev. 26.55; Min -99.97; Max 78.49.
  - June 2011 to Sep 2011 (808 obs): Mean -13.10; Std. Dev. 19.60; Min -75.28; Max 192.36.
- Table 2. Market measures of risk (2004-2010, 4229 obs):
  - Beta Mean 9.15; Std. Dev. 7.87; Min 0.16; Max 184.84.
  - Idiosyncratic Vol Mean 0.63; Std. Dev. 1.27; Min -4.08; Max 5.45.
  - Vol of monthly stock return Mean -1.52E-09; Std. Dev. 7.12E-08; Min -1.75E-06; Max 1.12E-06.
- Table 3. Explanatory variables (2006 (770 obs) and 2010 (808 obs)) (selected):
  - TCE/RWA Mean 11.26 / 10.73; Std. Dev. 8.37 / 6.00.
  - Tier 1/RWA Mean 12.73 / 13.06; Std. Dev. 7.61 / 5.03.
  - Total Capital/RWA Mean 14.47 / 14.96; Std. Dev. 7.37 / 4.87.
  - RWA/Assets Mean 42.40 / 66.60; Std. Dev. 31.47 / 14.86.
  - CustDeposits Mean 90.56 / 91.20; Std. Dev. 11.85 / 11.22.
  - Securities/Assets Mean 19.92 / 22.14; Std. Dev. 11.57 / 11.88.
  - NPL/Loans Mean 1.66 / 4.45; Std. Dev. 2.72 / 4.83.
  - ROAA Mean 0.87 / 0.38; Std. Dev. 0.90 / 1.18.
  - log(Assets) Mean 14.92 / 15.29; Std. Dev. 2.28 / 2.34.
  - Beta Mean 0.24 / 1.00; Std. Dev. 1.07 / 1.33.

### VI. Estimation results — stock returns (Model 1) and market risk (Model 2)
- Determinants of stock returns (June 30, 2007–September 30, 2008):
  - Main finding: stock returns are lower for banks with higher RWA/TA.
    - Effect magnitude: a one percentage point higher RWA/Tangible Assets ratio → stock return 0.06 percentage points lower.
    - Table 4a RWA/TangibleAssets coefficients: -0.065***, -0.059***, -0.064*** (standard errors: (0.013), (0.013), (0.011)).
  - Capital findings:
    - TCE/TA is positively related to stock returns; TCE/TangibleAssets coefficient: 0.292*** (0.074) in column (2).
    - Broader capital measures (Tier 1, total regulatory capital) not consistently significant in main specifications.
  - Other controls:
    - Funding stability, securities/assets, lower NPL/Loans, and higher ROAA associated with higher stock returns; securities/assets and ROAA particularly strong.
- Large-bank subsample (assets > 10 billion US$ in 2006):
  - RWA coefficient remains negative but not statistically significant: RWA/TangibleAssets coefficients: -0.086, -0.102, -0.059 (standard errors: (0.079), (0.071), (0.227)).
  - CustomerDeposits coefficients significant and economically large: 0.226*, 0.265***, 0.277*** (standard errors: (0.113), (0.077), (0.085)).
  - Funding stability: one percentage point increase in share of stable funding → stock return 0.25 percentage points higher (large-bank interpretation).
- Capital–liquidity trade-off (Table 5):
  - TCE/TangibleAssets coefficients in interaction models: 0.292***, 4.196***, 5.604** (standard errors: (0.074), (1.493), (2.197)).
  - (TCE/TangibleAssets)*CustDeposits coefficients: -0.041***, -0.048** (standard errors: (0.015), (0.019)) — indicates banks with more stable funding derive less incremental stock-return benefit from higher capital.
  - RWA/TangibleAssets coefficients remain negative and significant: -0.065***, -0.064***, -0.074*** (standard errors: (0.013), (0.012), (0.011)).
- Regional differences (Table 6):
  - RWA/TangibleAssets coefficients across regions: -0.065***; -0.053***; -0.144; -0.076*** (standard errors: (0.013),(0.012),(0.103),(0.014)).
  - Asia interaction: negative interaction coefficient between Asia indicator and RWA/TA = -0.103 (interpretation: Asian banks with higher RWA have lower stock returns relative to others).
  - Europe interaction: positive interaction coefficient = 0.169 (interpretation: markets do not reward European banks for lower RWA).
  - US sits between Asia and Europe in relationship between RWA and returns.
  - Additional patterns:
    - US banks receive a higher reward for holding more securities; European banks with higher securities may be penalized.
    - US banks: a one percentage point higher share of non-performing loans in 2006 → ~5.6 percentage points lower crisis stock returns for US banks (column (3) magnitude reported).
- Recent Eurozone debt crisis (June 30, 2011–September 30, 2011; Table 7):
  - Signs of coefficients similar to 2007–2008 results.
  - Statistically measurable effects in this short window: RWA/TA, securities/assets, and ROAA.
  - Selected coefficients: RWA/TangibleAssets coefficients: -0.096*; -0.239***; -0.061 (standard errors: (0.058),(0.064),(0.048)). Note: significance annotation includes * at the 11percent level.
- Market measures of risk (Model 2, 2004–2010; Table 8 and Table 10):
  - Overall: no consistent significant relationship between RWA and market measures of risk across full sample.
  - Capital effects:
    - TCE/TA (t-1) coefficients show concave relationship with stock return volatility and idiosyncratic volatility:
      - Table 8: TCE/TA (t-1) = -34.832*** (StockReturnVol), 0.460 (Beta), -1.425*** (Idiosyncratic Vol) with standardized betas (-0.252),(0.018),(-0.136).
      - TCE/TA squared (t-1) = 0.349***, 0.007, 0.026*** (standardized betas (0.107),(0.012),(0.104)).
  - Pre-crisis vs post-crisis (Table 10):
    - 2004-2006: TCE/TA (t-1) -17.641*** (StockReturnVol) with standardized beta (-0.336); TCE/TA squared 0.249*** (0.239); RWA/TA 0.401 (0.037).
    - 2008-2010: TCE/TA (t-1) -90.861*** (StockReturnVol) with standardized beta (-0.405); TCE/TA squared 2.522*** (0.256).
    - RWA relationship changed from positive pre-crisis (2004–2006) to negative post-crisis (2008–2010) with systematic risk and volatility measures.

### VII. Robustness and additional specifications (selected tables)
- Table 11a (capital mix effect on crisis returns):
  - (Tier1 - TCE)/Tier1 coefficient: -0.163** (0.078).
  - (TotalCapital-Tier1)/TotalCapital coefficient: -0.520** (0.190).
- Table 12a/12b (regulatory capital ratios for returns, 234 obs):
  - TCE/RWA (t-1) coefficient: 0.361 (0.557).
  - Tier1capital/RWA (t-1) coefficient: 0.392 (0.782).
  - TotalCapital/RWA (t-1) coefficient: 0.141 (0.746).
- Table 13a (capital ratios with a floor of 50 percent of assets):
  - TCE/RWAfloor coefficient: 0.163*** (0.036).
  - TotalCapital/RWAfloor coefficient: -0.147*** (0.046).
- Table 14 (reduced sample, max 17 banks per country):
  - RWA/TangibleAssets coefficients: -0.246*, -0.348***, -0.301* (standard errors: (0.126),(0.129),(0.153)).
  - ROAA coefficients: 8.232***, 5.977*, 7.579*** (standard errors: (2.803),(3.188),(2.777)).
- Table 15 (cross-section for 2007):
  - TCE/TangibleAssets (t-1): -10.334*** (SDofStockRet), -0.722 (Beta), -1.960*** (IdiosyncraticVol) with standardized betas (-0.189),(-0.036),(-0.211).
  - RWA/TangibleAssets (t-1): 0.288, -0.099, 0.105*** (standardized betas (0.030),(-0.028),(0.065)).

### VIII. Correlations and sample composition (appendix tables)
- Table A1. List of countries – full sample (selected entries with exact reported percentages):
  - Australia — 60.74% Sample
  - Canada — 91.11% Sample
  - China — 111.36% Sample
  - India — 121.49% Sample
  - Italy — 202.48% Sample
  - Japan — 8110.02% Sample
  - USA — 50162% Sample
  - (Full list contains 35 countries and reported percent-sample numbers.)
- Table A2. List of countries – reduced sample (selected):
  - Australia — 63.17% Sample
  - Canada — 115.82% Sample
  - Italy — 178.99% Sample
  - Japan — 178.99% Sample
  - USA — 136.88% Sample
  - (Reduced sample list contains reported percent-sample numbers for 35 countries.)
- Table A3. Correlation matrix of 2006 explanatory variables (766 observations) — selected pairwise correlations:
  - Corr(TCE/TangibleAssets, TCE/RWA) = 0.927.
  - Corr(TCE/TangibleAssets, RWA/TangibleAssets) = 0.149.
  - Corr(RWA/TangibleAssets, NPL/Loans) = 0.197.
  - Corr(TCE/TangibleAssets, log(Assets)) = -0.586.
  - Corr(Beta, log(Assets)) = 0.389.
  - Corr(CustDeposits, Securities/Assets) = -0.209.
  - (Full 9x9 correlation matrix reproduced in appendix.)

### IX. Conclusions — implications and policy-relevant synthesis
- Empirical synthesis:
  - Steady decline in reported RWA over the last decade accompanied by decline in capital quality.
  - Equity markets used RWA as an indicator of portfolio risk during the severe phase of the 2007–2008 crisis: higher RWA → worse stock returns (effect: ~0.06 percentage points lower return per one percentage point RWA/TangibleAssets).
  - Market reliance on RWA is weaker in jurisdictions where banks have greater discretion over RWA (Basel II IRB adopters), notably Europe.
  - For large banks, investors prioritized funding stability and asset quality over reported RWA and capital quality during the crisis.
  - Only the highest-quality capital (TCE) consistently mattered for market valuations.
  - Evidence of a capital–liquidity trade-off: more stable funding or more liquid assets reduce the incremental stock-return benefit from higher capital.
  - RWA do not generally predict market measures of bank risk across the full sample; relationship changed from positive pre-crisis to negative post-crisis, suggesting reported RWA may not have kept pace with realized market risk.
- Policy-relevant implications:
  - Markets partially discipline banks via stock prices when RWA reflect risk; where RWA are less credible, markets rely more on other balance-sheet measures.
  - Asymmetry of information about RWA credibility between banks, supervisors, and market participants can increase uncertainty about capital adequacy and threaten financial stability in crises.
  - Findings support complementing model-based RWA with robust backstops (e.g., leverage ratio) and incorporating market information into supervision.

*Source: _wp1236 - APPENDIX TABLES (extracted pages 3–17 of the provided PDF).*

### APPENDIX TABLES ........................................................................................................

### _wp1236 - APPENDIX TABLES

### I. Introduction — framing and research questions
- Key policy context: Basel II sets risk-weighted capital requirement of at least 8 percent of RWA; Basel III emphasizes higher quality capital and proposes a complementary non-risk-weighted leverage ratio.2
- Core questions:
  - Did banks with lower risk-weighted assets (RWA) have higher stock returns during the 2007–2008 crisis?
  - Do market-based measures of bank risk correspond to reported RWA?
- Hypotheses summarized:
  - (H1) Banks with lower RWA will perform better during the crisis.
  - (H2) Banks with higher capital ratios will have higher stock returns during the crisis and banks with more stable funding will have higher stock returns during the crisis.
  - (H2-A) Banks with more stable funding will not receive as high a reward for higher capital, compared to banks with less stable funding.
  - (H3) Market measures of bank risk will be positively correlated with RWA.
  - (H3-A) This relationship may change after the financial crisis.

### II. Stylized facts (observed trends)
- Long-run trends for US bank holding companies (BHCs):
  - Decline in RWA/Tangible Assets since late 1990s (Figure 1).
  - Decline in quality of regulatory capital (Total Capital/RWA, Tier1 Capital/RWA, TCE/RWA) since late 1990s (Figure 2).
- Regional differences:
  - European banks have on average much lower RWA as a share of total assets than banks in North America or Asia (Figure 3).5
- Definitions and notes:
  - Total regulatory capital = Tier 1 capital + Tier 2 capital.
  - Tangible common equity (TCE) = common equity minus intangibles and goodwill.

### III. RWA: Basel II conceptual framework and measurement
- Basel I: simple buckets for sovereigns, banks, mortgages, corporates.
- Basel II:
  - Introduced value-at-risk (VaR) for market risk and extended model-based approaches to credit risk.
  - Standardized Approach (SA): risk weights vary by external CRA ratings; home mortgages risk weight reduced from 50 to 35 percent relative to Basel I.
  - Internal Ratings-Based (IRB) approach built on three parameters: (i) PD (probability of default), (ii) EAD (exposure at default), (iii) LGD (loss given default).6
  - Expected loss (EL) = PD x EAD x LGD; in percentage of EAD, EL = PD x LGD.
  - Capital requirement (K) set using a Merton model depending on PD and LGD.
  - RWA = 12.5 x K x EAD.
- Important caveat: under advanced IRB, banks have considerable discretion in reporting PD, EAD, and LGD.

### IV. Literature connections
- Studies of bank performance in crisis:
  - Demirgüç-Kunt, Detragiache, and Merrouche (2010): stronger capital associated with better stock performance during crisis; leverage ratio often stronger predictor than risk-adjusted ratio.7
  - Beltratti and Stulz (2010): large banks with more capital and higher deposit reliance had higher stock returns during the crisis; capital measures did not robustly affect market-risk measures.8
- U.S. empirical work:
  - Avery and Berger (1991b), Bradley et al (1991): RWA positively related to failure probability/accounting risk but relationships weak.
  - Cordell and King (1995): market and regulatory capital measures agree partly on capital adequacy but asset-risk measures not positively correlated.
- Incentives and regulatory arbitrage:
  - Evidence that securitization and product innovation allowed reduction of reported RWA and capital (Acharya, Schnabl, and Suarez (2010); Jones (2000); Merton (1995)).
  - Acharya (2011) and Eurozone experience highlight cases where regulatory RWA weights were misaligned with realized risk (e.g., mortgage-backed securities; sovereign exposures with zero risk-weight).

### V. Data and methodology — sample, variables, empirical strategy
- Sample and data:
  - 808 publicly-listed deposit-taking institutions in 35 countries spanning North America, Europe, Asia, and Australia.10
  - Balance-sheet and income statement data: Bankscope. Stock return data: Datastream.
  - Outliers removed at 1 percent and 99 percent levels.
- Crisis-period stock return statistics:
  - Average bank stock return from June 30, 2007 to September 30, 2008 = -31 percent (standard deviation 27 percent).
  - Stock return during Eurozone debt crisis (June 30, 2011 to September 30, 2011) = -13 percent (standard deviation 20 percent).
- Main explanatory variables:
  - RWA scaled by tangible assets (RWA/TA).
  - Capital measures: tangible common equity (TCE), Tier 1 regulatory capital, total regulatory capital. TCE used in main analysis.13
  - Funding stability = share of customer deposits in total deposits and short-term funding (equal to 100 – x where x is the funding fragility measure of Demirgüç-Kunt and Huizinga (2009)).14
  - Ratio of securities to assets (proxy for asset liquidity).
  - Share of non-performing loans.
  - ROAA (return on average assets).
  - Log of assets (bank size).
  - Country fixed effects and bank specialization dummies.15
- Estimation models:
  - Model (1) cross-section (LSDV with country fixed effects) for real stock returns in US dollars over June 30, 2007 to September 30, 2008; explanatory variables lagged one year.
    - Dependent variable: real stock return i over crisis period.
    - Key regressors: RWA/TA, capital ratio (TCE/TA), funding stability, securities/assets, non-performing loans, ROAA, log assets, country dummies, specialization dummies.
    - Interaction specifications: capital × funding stability and capital × securities/assets to test capital–liquidity trade-off.
  - Model (2) panel (2004–2010) for market measures of risk (stock return volatility, CAPM beta, idiosyncratic volatility), including squared capital term (TCE/TA)^2 to test U-shaped relationship.
  - Market-risk construction:
    - CAPM estimated with monthly, US-dollar, real excess returns over the previous 60 months:
      - Risk-free proxied by 3-month US Treasury bill rate adjusted to monthly.
      - Market indexes: MSCI national market index and MSCI World index.
    - Systematic risk = estimated CAPM beta (β1).
    - Idiosyncratic volatility = standard deviation of residual ε over 60 months.
    - Stock return volatility = standard deviation of monthly stock returns in year t.

### VI. Estimation results — stock returns and market risk
- Determinants of stock returns (Model 1, crisis period June 30, 2007–September 30, 2008):
  - Main finding: stock returns are lower for banks with higher RWA/TA.
    - Effect magnitude: a one percentage point higher RWA/Tangible Assets ratio → stock return 0.06 percentage points lower.
  - Capital measure findings:
    - TCE/TA is positively related to stock returns; broader capital measures (Tier 1, total regulatory capital) are not consistently significant.
  - Other control results:
    - Funding stability, securities/assets (liquidity), lower non-performing loans, and higher ROAA associated with higher stock returns; securities/assets and ROAA have particularly strong statistical relationships.
- Large-bank subsample (assets > 10 billion US$ in 2006):
  - RWA coefficient remains negative but is not statistically significant.
  - Capital measures not significant.
  - Funding stability effect becomes statistically significant and larger: one percentage point increase in share of stable funding → stock return 0.25 percentage points higher.
  - Non-performing loans and ROAA effects similar or stronger.
  - Interpretation: investors in large banks paid less attention to RWA and capital quality and more to funding stability and asset quality.
- Capital–liquidity trade-off (interaction specifications, Table 5):
  - Negative interaction coefficient between capital and funding stability: banks with more stable funding derive less incremental stock-return benefit from higher capital.
  - Negative interaction coefficient between capital and securities/assets: banks with more liquid assets derive less incremental stock-return benefit from higher capital.
- Regional differences (Table 6):
  - Regulatory regimes differ:
    - Europe largely implemented Basel II (IRB models); Asia mixed (some large jurisdictions adopted Basel II; smaller jurisdictions followed Basel I); US largely under Basel I during crisis (largest internationally active banks to move under Basel II by 2012).
  - Interaction results:
    - Asia: negative interaction coefficient between Asia indicator and RWA/TA = -0.103 (banks in Asia with higher RWA have lower stock returns relative to others).
    - Europe: positive interaction coefficient = 0.169 (indicates a positive relationship between RWA/TA and stock returns for Europe, unlike rest), suggesting markets do not reward European banks for lower RWA.
    - US: relationship between RWA and returns sits between Asia and Europe.
  - Additional regional patterns:
    - US banks receive a higher reward for holding more securities; European banks with higher securities may be penalized.
    - US banks are more heavily penalized for higher shares of non-performing loans: a one percentage point higher share of non-performing loans in 2006 → ~5.6 percentage points lower crisis stock returns for US banks (column (3)).
  - Note: magnitudes are consistent with hypothesis that markets discount RWA credibility where banks can “game” RWA; differences not always statistically significant.
- Recent Eurozone debt crisis (June 30, 2011–September 30, 2011; Table 7):
  - Signs of coefficients similar to 2007–2008 results.
  - Statistically measurable effects in this short window: RWA/TA, securities/assets, and ROAA.
- Market measures of risk (Model 2, 2004–2010; Table 8 and Table 10):
  - Overall: no consistent significant relationship between RWA and market measures of risk (stock return volatility, beta, idiosyncratic volatility) across full sample period.
  - Capital effects:
    - For stock return volatility and idiosyncratic volatility: negative relationship with capital up to a point (evidence consistent with a concave relationship — benefits of lower leverage increase rapidly but only up to a threshold).
    - Squared capital term included to test U-shaped hypothesis (Calem and Rob (1999)).
  - Pre-crisis vs post-crisis (Table 10):
    - Pre-crisis (2004–2006): positive relationship between RWA and systematic risk (beta).
    - Post-crisis (2008–2010): relationship between RWA and systematic risk turns negative; relationship between RWA and stock return volatility also negative.
    - Possible interpretation: market measures of risk (stock volatility) rose sharply after crisis while banks did not adjust RWA upward to reflect increased risk.

### VII. Conclusions — implications and synthesis
- Empirical summary:
  - There has been a steady decline in reported RWA over the last decade, accompanied by a decline in capital quality.
  - Equity markets used RWA as an indicator of portfolio risk during the severe phase of the 2007–2008 crisis: higher RWA → worse stock returns.
  - This market reliance on RWA is weaker in jurisdictions where banks have greater discretion over RWA calculation (Basel II IRB adopters), notably Europe.
  - For large banks, investors prioritized funding stability and asset quality over reported RWA and capital quality during the crisis.
  - Only the highest-quality capital (TCE) consistently mattered for market valuations.
  - There is evidence of a capital–liquidity trade-off in market assessments: more stable funding or more liquid assets reduce the incremental return benefit from higher capital.
  - RWA do not generally predict market measures of bank risk across the full sample period; relationship changed from positive pre-crisis (2004–2006) to negative post-crisis (2008–2010), possibly reflecting a failure of reported RWA to keep pace with realized market risk.
- Policy-relevant implications:
  - Markets partially discipline banks via stock prices when RWA reflect risk; but where RWA are less credible (due to internal models or regulatory discretion), markets look to other balance-sheet measures.
  - The asymmetry of information between banks, supervisors, and market participants about the credibility of RWA can increase uncertainty about capital adequacy and threaten financial stability in crises.
  - The findings support the view that supervisory and regulatory frameworks should consider complementing model-based RWA with robust backstops (e.g., leverage ratio) and incorporate market information into supervision.

*Source: _wp1236 - APPENDIX TABLES (extracted pages 3–17 of the provided PDF).*

### References

### References

### References cited
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- Acharya, Viral V. (2011), “Ring-fencing is good, but no panacea,” The Future of Banking, Edited by Thorsten Beck, A VoxEU.org eBook, Centre for Economic Policy Research, 2011, pp 35  
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- Bradley, M.G., C.A. Wambeke, and D.A. Whidbee, 1991, “Risk weights, risk-based capital and deposit insurance,” Journal of Banking and Finance, 15 (August): 875-893  
- Calem, Paul. and Rafael Rob (1999), “The Impact of Capital-Based Regulation on Bank Risk-Taking,” Journal of Financial Intermediation, Volume 8, Issue 4, pp 317–352  
- Cordell, L.R., and K.K. King, 1995, “A market evaluation of the risk-based capital standards for the U.S. financial system,” Journal of Banking and Finance, 19 (April)  
- Demirgüç-Kunt, Asli and Detragiache, Enrica and Merrouche, Ouarda (2010) “Bank capital : lessons from the financial crisis,” Policy Research Working Paper Series 5473, The World Bank  
- Demirgüç-Kunt, Asli and Harry Huizinga (2009), “Bank activity and funding strategies: The impact on risk and return,” working paper, European Banking Center, Tilburg University, Holland  
- De Nicolò, Giovanni Dell’Ariccia, Luc Laeven, and Fabian Valencia (July 27, 2010), “Monetary Policy and Bank Risk Taking”, IMF Staff Position Note SPN/10/09  
- Duchin, Ran and Denis Sosyura (September 2011), “Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid,” University of Michigan Ross School of Business Working Paper No. 1165  
- Flannery, Mark J. and Kasturi P. Rangan (2002), “Market forces at work in the banking industry: evidence from the capital buildup of the 1990s,” Proceedings, Federal Reserve Bank of Chicago, issue May.  
- Gorton, Gary, (2010), “Slapped by the invisible hand,” Oxford University Press, Oxford, England  
- Jones, D.S., and K.K. King (April1995), “The implementation of prompt corrective action,” Journal of Banking and Finance, 19  
- Kato, Ryo., Kobayashi, Shun and Yumi Saita (May 2010), “Calibrating the level of capital: The way we see it,” Bank of Japan Working Paper No 10-E-6  
- King, Michal R. (2009), “The cost of equity for global banks: a CAPM perspective from 1990 to 2009,” BIS Quarterly Review September 2009, pp 59-73  
- Le Leslé, Vanessa and Sofiya Avramova (2011), “Revisiting Risk-Weighted Assets,” forthcoming IMF Working Paper, IMF, Washington DC  
- Merton, R.C. (April 1995), “Financial innovation and the management and regulation of financial institutions”, Journal of Banking, and Finance 19, pp 461-481  
- Risk Magazine June 24, 2011, “FSA's Turner: RWA divergence would undermine Basel III”  
- Risk Magazine June 24, 2011, “Europe lax on RWA calculations, says Bair”  

### Tables and key reported statistics
- Table 1. Descriptive statistics – stock returns over periods of crisis  
  - June 2007 to Sep 2008 (770 obs) / June 2011 to Sep 2011 (808 obs)  
  - Mean -31.37 / -13.10  
  - Std. Dev. 26.55 / 19.60  
  - Min -99.97 / -75.28  
  - Max 78.49 / 192.36

- Table 2. Descriptive statistics – market measures of risk (2004-2010, 4229 obs)  
  - Beta Mean 9.15; Std. Dev. 7.87; Min 0.16; Max 184.84  
  - Idiosyncratic Vol Mean 0.63; Std. Dev. 1.27; Min -4.08; Max 5.45  
  - Vol of monthly stock return Mean -1.52E-09; Std. Dev. 7.12E-08; Min -1.75E-06; Max 1.12E-06

- Table 3. Descriptive statistics – explanatory variables (2006 (770 obs) and 2010 (808 obs))  
  - TCE/RWA Mean 11.26 / 10.73; Std. Dev. 8.37 / 6.00  
  - Tier 1/RWA Mean 12.73 / 13.06; Std. Dev. 7.61 / 5.03  
  - Total Capital/RWA Mean 14.47 / 14.96; Std. Dev. 7.37 / 4.87  
  - RWA/Assets Mean 42.40 / 66.60; Std. Dev. 31.47 / 14.86  
  - CustDeposits Mean 90.56 / 91.20; Std. Dev. 11.85 / 11.22  
  - Securities/Assets Mean 19.92 / 22.14; Std. Dev. 11.57 / 11.88  
  - NPL/Loans Mean 1.66 / 4.45; Std. Dev. 2.72 / 4.83  
  - ROAA Mean 0.87 / 0.38; Std. Dev. 0.90 / 1.18  
  - log(Assets) Mean 14.92 / 15.29; Std. Dev. 2.28 / 2.34  
  - Beta Mean 0.24 / 1.00; Std. Dev. 1.07 / 1.33

- Table 4a. Determinants of returns: Do risk-weighted assets affect stock returns? (All banks, Dependent variable: Stock return from June 2007 to Sep 2008, Observations 766/760/766, R-squared 0.181/0.178/0.179)  
  - RWA/TangibleAssets coefficients: -0.065***, -0.059***, -0.064*** (standard errors: (0.013), (0.013), (0.011))  
  - TCE/TangibleAssets coefficient: 0.292*** (0.074) in column (2)

- Table 4b. Determinants of returns: Do risk-weighted assets affect stock returns of large banks? (Large banks: Assets>10 Billion US$, Observations 226, R-squared 0.369/0.370/0.366)  
  - RWA/TangibleAssets coefficients: -0.086, -0.102, -0.059 (standard errors: (0.079), (0.071), (0.227))  
  - CustomerDeposits coefficients include 0.226*, 0.265***, 0.277*** (standard errors: (0.113), (0.077), (0.085))

- Table 5. Determinants of returns: Is there a capital and liquidity trade-off? (All banks, Observations 766, R-squared 0.181/0.186/0.193)  
  - TCE/TangibleAssets coefficients: 0.292***, 4.196***, 5.604** (standard errors: (0.074), (1.493), (2.197))  
  - (TCE/TangibleAssets)*CustDeposits coefficients: -0.041***, -0.048** (standard errors: (0.015), (0.019))  
  - RWA/TangibleAssets coefficients: -0.065***, -0.064***, -0.074*** (standard errors: (0.013), (0.012), (0.011))

- Table 6. Determinants of returns: Are the effects of RWA different in the United States, Europe, and Asia? (All banks, Observations 766, R-squared 0.181/0.190/0.213/0.190)  
  - TCE/TangibleAssets reported: 0.292***; 0.298***; 0.895**; 0.306*** (standard errors: (0.074),(0.078),(0.424),(0.067))  
  - RWA/TangibleAssets coefficients: -0.065***; -0.053***; -0.144; -0.076*** (standard errors: (0.013),(0.012),(0.103),(0.014))

- Table 7. Determinants of returns: Recent performance during the European sovereign debt crisis (All banks, Dependent variable: Stock return from June 2011 to Sep 2011, Observations 808, R-squared 0.401/0.409/0.409)  
  - TCE/TangibleAssets coefficients: -0.035; 0.358; 0.009 (standard errors: (0.066),(0.330),(0.070))  
  - RWA/TangibleAssets coefficients: -0.096*; -0.239***; -0.061 (standard errors: (0.058),(0.064),(0.048))  
  - Note: Table uses values for 2010; significance note indicates * at the 11percent level for one annotation.

- Table 8. Market measures of risk and balance-sheet measures of risk exposure (All banks, 2004-2010, Observations 4229/4229/4229, R-squared 0.459/0.225/0.023)  
  - TCE/TA (t-1) coefficients: -34.832*** (StockReturnVol), 0.460 (Beta), -1.425*** (Idiosyncratic Vol) with standardized beta coefficients in parentheses (-0.252),(0.018),(-0.136)  
  - TCE/TA squared (t-1) coefficients: 0.349***, 0.007, 0.026*** (standardized betas (0.107),(0.012),(0.104))  
  - RWA/TA (t-1) coefficients: 0.339, -0.017, 0.004 (standardized betas (0.015),(-0.004),(0.002))

- Table 9. Descriptive statistics – market measures of risk  
  - Panel A: pre-crisis (2004-2006, 1403 obs) Beta Mean 5.65; Idiosyncratic Vol Mean 0.25; Vol of monthly stock return Mean -1.72E-09; Std. Dev. Beta 3.24; Idiosyncratic Vol Std. Dev. 1.02; Vol Std. Dev. 8.56E-08; Min/Max values as reported.  
  - Panel B: post-crisis (2008-2010, 1680 obs) Beta Mean 12.84; Idiosyncratic Vol Mean 1.00; Vol of monthly stock return Mean -1.15E-09; Std. Dev. Beta 8.07; Idiosyncratic Vol Std. Dev. 1.41; Vol Std. Dev. 5.57E-08; Min/Max values as reported.

- Table 10. Market measures of risk and balance-sheet measures of risk exposure - have the relationships changed since the crisis? (All banks, Panels 2004-2006 and 2008-2010)  
  - 2004-2006 (Observations 1403, R-squared 0.227/0.214/0.054) includes TCE/TA (t-1) -17.641*** (StockReturnVol) with standardized beta (-0.336), TCE/TA squared 0.249*** (0.239), RWA/TA 0.401 (0.037), etc.  
  - 2008-2010 (Observations 1680, R-squared 0.381/0.252/0.027) includes TCE/TA (t-1) -90.861*** (StockReturnVol) with standardized beta (-0.405), TCE/TA squared 2.522*** (0.256), etc.

- Table 11a. How does the capital mix affect stock returns? (All banks, Dependent variable: Stock return from June 2007 to Sep 2008, Observations 676/666, R-squared 0.186/0.197)  
  - (Tier1 - TCE)/Tier1 coefficient: -0.163** (0.078) in column (1)  
  - (TotalCapital-Tier1)/TotalCapital coefficient: -0.520** (0.190) in column (2)

- Table 11b. How does the capital mix affect stock returns? Recent performance during the European sovereign debt crisis (All banks, Dependent variable: Stock return from June 2011 to Sep 2011, Observations 666/658, R-squared 0.385/0.384)  
  - (Tier1 - TCE)/Tier1 coefficient: -0.017** (0.007) in column (1)  
  - (TotalCapital-Tier1)/TotalCapital coefficient: -0.031 (0.047) in column (2)

- Table 12a. Determinants of banks’ stock returns over the crisis Comparing regulatory capital ratios (Dependent variable: Stock Return from June 30, 2007 to Sep 30, 2008, Observations 234, R-squared 0.380/0.379/0.378)  
  - TCE/RWA (t-1) coefficient: 0.361 (0.557) in column (1)  
  - Tier1capital/RWA (t-1) coefficient: 0.392 (0.782) in column (2)  
  - TotalCapital/RWA (t-1) coefficient: 0.141 (0.746) in column (3)

- Table 12b. Determinants of banks’ stock returns over the crisis – large banks (Large banks: Assets > 10 billion $US, Observations 234, R-squared 0.380/0.379/0.378)  
  - Same reported coefficients as Table 12a for the large-bank subsample.

- Table 13a. Determinants of banks’ stock returns over the crisis – when capital ratios have a floor of 50 percent of assets (All banks, Observations 766, R-squared 0.178/0.175/0.178)  
  - TCE/RWAfloor coefficient: 0.163*** (0.036) in column (1)  
  - TotalCapital/RWAfloor coefficient: -0.147*** (0.046) in column (3)

- Table 13b. Determinants of banks’ stock returns over the crisis – when capital ratios have a floor of 50 percent of assets – large banks (Large banks: Assets>10 Billion US$, Observations 226, R-squared 0.367/0.366/0.367)  
  - TCE/RWAfloor coefficient: 0.527 (0.580) in column (1)  
  - CustDeposits coefficients: 0.213*, 0.262***, 0.278*** across columns

- Table 14. Determinants of returns: Do risk-weighted assets affect stock returns? Reduced sample – maximum of 17 banks per country (Reduced sample, Observations 189/185/189, R-squared 0.506/0.515/0.507)  
  - RWA/TangibleAssets coefficients: -0.246*, -0.348***, -0.301* (standard errors: (0.126),(0.129),(0.153))  
  - ROAA coefficients: 8.232***, 5.977*, 7.579*** (standard errors: (2.803),(3.188),(2.777))

- Table 15. Market measures of risk and balance-sheet measures of risk exposure Cross-section for 2007 (All banks, 2007, Observations 758, R-squared 0.278/0.189/0.117)  
  - TCE/TangibleAssets (t-1) coefficients: -10.334*** (SDofStockRet), -0.722 (Beta), -1.960*** (IdiosyncraticVol) with standardized betas (-0.189),(-0.036),(-0.211)  
  - RWA/TangibleAssets (t-1) coefficients: 0.288, -0.099, 0.105*** (standardized betas (0.030),(-0.028),(0.065))  
  - ROAA (t-1) coefficient: -50.156*** (SDofStockRet) with standardized beta (-0.151) and 6.788*** (Beta) with standardized beta (0.056)

*Content unit: _wp1236 - References*

### APPENDIX TABLES

### _wp1236 - APPENDIX TABLES

### Table A1. List of countries – full sample
- Australia — 60.74% Sample
- Austria — 40.5% Sample
- Bangladesh — 50.62% Sample
- Belgium — 20.25% Sample
- Canada — 91.11% Sample
- China — 111.36% Sample
- Denmark — 111.36% Sample
- Finland — 20.25% Sample
- France — 40.5% Sample
- Germany — 50.62% Sample
- Greece — 91.11% Sample
- Hong Kong — 60.74% Sample
- India — 121.49% Sample
- Indonesia — 80.99% Sample
- Italy — 202.48% Sample
- Japan — 8110.02% Sample
- Korea — 40.5% Sample
- Malaysia — 91.11% Sample
- Netherlands — 10.12% Sample
- Norway — 131.61% Sample
- Philippines — 111.36% Sample
- Poland — 91.11% Sample
- Russian Federation — 70.87% Sample
- Serbia — 10.12% Sample
- Singapore — 30.37% Sample
- Spain — 80.99% Sample
- Sri Lanka — 60.74% Sample
- Sweden — 40.5% Sample
- Switzerland — 30.37% Sample
- Taiwan — 80.99% Sample
- Thailand — 60.74% Sample
- Turkey — 101.24% Sample
- Ukraine — 20.25% Sample
- UK — 70.87% Sample
- USA — 50162% Sample

### Table A2. List of countries – reduced sample used in several robustness checks
- Australia — 63.17% Sample
- Austria — 21.06% Sample
- Belgium — 10.53% Sample
- Canada — 115.82% Sample
- China — 73.7% Sample
- Denmark — 73.7% Sample
- Finland — 10.53% Sample
- France — 10.53% Sample
- Germany — 52.65% Sample
- Greece — 52.65% Sample
- Hong Kong — 63.17% Sample
- India — 10.53% Sample
- Indonesia — 31.59% Sample
- Italy — 178.99% Sample
- Japan — 178.99% Sample
- Korea — 31.59% Sample
- Malaysia — 84.23% Sample
- Norway — 94.76% Sample
- Philippines — 94.76% Sample
- Poland — 63.17% Sample
- Russian Federation — 42.12% Sample
- Singapore — 31.59% Sample
- Spain — 84.23% Sample
- Sri Lanka — 31.59% Sample
- Sweden — 42.12% Sample
- Switzerland — 31.59% Sample
- Taiwan — 21.06% Sample
- Thailand — 84.23% Sample
- Turkey — 84.23% Sample
- Ukraine — 21.06% Sample
- UK — 63.17% Sample
- USA — 136.88% Sample

### Table A3. Descriptive statistics – correlations of explanatory variables in 2006
- Sample size: All banks: 766 observations

- Variables (row / column): TCE/TangibleAssets; TCE/RWA; RWA/TangibleAssets; CustDeposits; Securities/Assets; NPL/Loans; ROAA; log(Assets); Beta

- Correlation matrix (rows listed; columns in same order as variables above):
  - TCE/TangibleAssets
    - with TCE/TangibleAssets: 1
    - with TCE/RWA: 0.927
    - with RWA/TangibleAssets: 0.149
    - with CustDeposits: 0.274
    - with Securities/Assets: -0.144
    - with NPL/Loans: -0.116
    - with ROAA: -0.297
    - with log(Assets): -0.586
    - with Beta: -0.169
  - TCE/RWA
    - with TCE/TangibleAssets: 0.927
    - with TCE/RWA: 1
    - with RWA/TangibleAssets: 0.124
    - with CustDeposits: 0.203
    - with Securities/Assets: 0.082
    - with NPL/Loans: -0.132
    - with ROAA: -0.313
    - with log(Assets): -0.453
    - with Beta: -0.104
  - RWA/TangibleAssets
    - with TCE/TangibleAssets: 0.149
    - with TCE/RWA: 0.124
    - with RWA/TangibleAssets: 1
    - with CustDeposits: -0.074
    - with Securities/Assets: -0.083
    - with NPL/Loans: 0.197
    - with ROAA: -0.137
    - with log(Assets): 0.133
    - with Beta: 0.169
  - CustDeposits
    - with TCE/TangibleAssets: 0.274
    - with TCE/RWA: 0.203
    - with RWA/TangibleAssets: -0.074
    - with CustDeposits: 1
    - with Securities/Assets: -0.209
    - with NPL/Loans: -0.055
    - with ROAA: -0.107
    - with log(Assets): -0.505
    - with Beta: -0.208
  - Securities/Assets
    - with TCE/TangibleAssets: -0.144
    - with TCE/RWA: 0.082
    - with RWA/TangibleAssets: -0.083
    - with CustDeposits: -0.209
    - with Securities/Assets: 1
    - with NPL/Loans: 0.083
    - with ROAA: -0.052
    - with log(Assets): 0.339
    - with Beta: 0.104
  - NPL/Loans
    - with TCE/TangibleAssets: -0.116
    - with TCE/RWA: -0.132
    - with RWA/TangibleAssets: 0.197
    - with CustDeposits: -0.055
    - with Securities/Assets: 0.083
    - with NPL/Loans: 1
    - with ROAA: 0.014
    - with log(Assets): 0.153
    - with Beta: 0.227
  - ROAA
    - with TCE/TangibleAssets: -0.297
    - with TCE/RWA: -0.313
    - with RWA/TangibleAssets: -0.137
    - with CustDeposits: -0.107
    - with Securities/Assets: -0.052
    - with NPL/Loans: 0.014
    - with ROAA: 1
    - with log(Assets): 0.157
    - with Beta: 0.022
  - log(Assets)
    - with TCE/TangibleAssets: -0.586
    - with TCE/RWA: -0.453
    - with RWA/TangibleAssets: 0.133
    - with CustDeposits: -0.505
    - with Securities/Assets: 0.339
    - with NPL/Loans: 0.153
    - with ROAA: 0.157
    - with log(Assets): 1
    - with Beta: 0.389
  - Beta
    - with TCE/TangibleAssets: -0.169
    - with TCE/RWA: -0.104
    - with RWA/TangibleAssets: 0.169
    - with CustDeposits: -0.208
    - with Securities/Assets: 0.104
    - with NPL/Loans: 0.227
    - with ROAA: 0.022
    - with log(Assets): 0.389
    - with Beta: 1

*Source: APPENDIX TABLES, _wp1236 - APPENDIX TABLES*

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