How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis
IMF Working Papers, January 1, 2012
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- How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis
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Bibliographic details
- Authors: Sonali Das, Amadou N Sy
- Published: January 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781463933791.001
Summary of study and approach
- Research question: How do investors account for the riskiness of banks' risk-weighted assets (RWA) by examining determinants of stock returns and market measures of risk.
- Authors: Sonali Das, Amadou N Sy
- Publication date: January 1, 2012
- Publication: IMF Working Papers, Working Paper No. 2012/036, Issue: 036, Volume: 2012
- Pages: 38
- DOI: https://doi.org/10.5089/9781463933791.001
- Stock No: WPIEA2012036
- ISBN: 9781463933791
- ISSN: 1018-5941
Key empirical findings
- Banks with higher RWA had lower stock returns over the US and European crises.
- The negative relationship between RWA and stock returns is weaker in Europe where banks can use Basel II internal risk models.
- For large banks, investors placed comparatively less weight on RWA and instead rewarded:
- lower wholesale funding
- better asset quality
- RWA generally do not predict market measures of risk; however:
- there is evidence of a positive relationship between RWA and market measures of risk before the US crisis
- this relationship becomes negative after the US crisis
Subject areas and keywords (as provided)
- Subject: Banking; Capital adequacy requirements; Financial crises; Financial institutions; Financial regulation and supervision; Nonperforming loans; Securities; Stocks
- Keywords: Asia and Pacific; bank's specialization; Banks; Basel III; capital; Capital adequacy requirements; capital requirement; crisis; Europe; liquidity; market index; Nonperforming loans; North America; regulation; return on assets; risk weighted assets; Securities; stock return; Stocks; tangible assets; WP
Implications highlighted by the study
- Investor valuation of bank risk is influenced by regulatory frameworks (e.g., Basel II internal models) and bank-specific characteristics (size, funding structure, asset quality).
- Traditional RWA metrics may not consistently predict market measures of risk across time periods and regions; investor attention can shift to other indicators for large banks.
Source: IMF Working Paper "How Risky Are Banks' Risk Weighted Assets? Evidence From the Financial Crisis" by Sonali Das and Amadou N Sy, January 1, 2012.
Content in this bundle
- _wp1236 - Appendix Tables