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

Author: Mr.Sonali Das

Publisher: International Monetary Fund

Published: 2012-01-01

Total Pages: 38

ISBN-13: 1463933797

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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.

Revisiting Risk-Weighted Assets
Revisiting Risk-Weighted Assets

Author: Vanessa Le Leslé

Publisher: International Monetary Fund

Published: 2012-03-01

Total Pages: 50

ISBN-13: 1475502656

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In this paper, we provide an overview of the concerns surrounding the variations in the calculation of risk-weighted assets (RWAs) across banks and jurisdictions and how this might undermine the Basel III capital adequacy framework. We discuss the key drivers behind the differences in these calculations, drawing upon a sample of systemically important banks from Europe, North America, and Asia Pacific. We then discuss a range of policy options that could be explored to fix the actual and perceived problems with RWAs, and improve the use of risk-sensitive capital ratios.

Heterogeneity of Bank Risk Weights in the EU
Heterogeneity of Bank Risk Weights in the EU

Author: Rima Turk-Ariss

Publisher: International Monetary Fund

Published: 2017-06-09

Total Pages: 48

ISBN-13: 1484302958

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Concerns about excessive variability in bank risk weights have prompted their review by regulators. This paper provides prima facie evidence on the extent of risk weight heterogeneity across broad asset classes and by country of counterparty for major banks in the European Union using internal models. It also finds that corporate risk weights are sensitive to the riskiness of an average representative firm, but not to a market indicator of a firm’s probablity of default. Under plausible yet severe hypothetical scenarios for harmonized risk weights, counterfactual capital ratios would decline significantly for some banks, but they would not experience a shortfall relative to Basel III’s minimum requirements. This, however, does not preclude falling short of meeting additional national supervisory capital requirements.

Bank Funding Structures and Risk
Bank Funding Structures and Risk

Author: Mr.Francisco F. Vazquez

Publisher: International Monetary Fund

Published: 2012-01-01

Total Pages: 33

ISBN-13: 1463933142

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This paper analyzes the evolution of bank funding structures in the run up to the global financial crisis and studies the implications for financial stability, exploiting a bank-level dataset that covers about 11,000 banks in the U.S. and Europe during 2001?09. The results show that banks with weaker structural liquidity and higher leverage in the pre-crisis period were more likely to fail afterward. The likelihood of bank failure also increases with bank risk-taking. In the cross-section, the smaller domestically-oriented banks were relatively more vulnerable to liquidity risk, while the large cross-border banks were more susceptible to solvency risk due to excessive leverage. The results support the proposed Basel III regulations on structural liquidity and leverage, but suggest that emphasis should be placed on the latter, particularly for the systemically-important institutions. Macroeconomic and monetary conditions are also shown to be related with the likelihood of bank failure, providing a case for the introduction of a macro-prudential approach to banking regulation.

Accounting discretion of banks during a financial crisis
Accounting discretion of banks during a financial crisis

Author: Mr.Luc Laeven

Publisher: International Monetary Fund

Published: 2009-09-01

Total Pages: 43

ISBN-13: 1451873549

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This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.

Bank Leverage and Monetary Policy's Risk-Taking Channel
Bank Leverage and Monetary Policy's Risk-Taking Channel

Author: Mr.Giovanni Dell'Ariccia

Publisher: International Monetary Fund

Published: 2013-06-06

Total Pages: 41

ISBN-13: 1484381130

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We present evidence of a risk-taking channel of monetary policy for the U.S. banking system. We use confidential data on the internal ratings of U.S. banks on loans to businesses over the period 1997 to 2011 from the Federal Reserve’s survey of terms of business lending. We find that ex-ante risk taking by banks (as measured by the risk rating of the bank’s loan portfolio) is negatively associated with increases in short-term policy interest rates. This relationship is less pronounced for banks with relatively low capital or during periods when banks’ capital erodes, such as episodes of financial and economic distress. These results contribute to the ongoing debate on the role of monetary policy in financial stability and suggest that monetary policy has a bearing on the riskiness of banks and financial stability more generally.

Bank Capital
Bank Capital

Author: Ouarda Merrouche

Publisher: International Monetary Fund

Published: 2010-12-01

Total Pages: 38

ISBN-13: 1455254878

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Using a multi-country panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

Benefits and Costs of Bank Capital
Benefits and Costs of Bank Capital

Author: Jihad Dagher

Publisher: International Monetary Fund

Published: 2016-03-03

Total Pages: 38

ISBN-13: 1513539337

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The appropriate level of bank capital and, more generally, a bank’s capacity to absorb losses, has been at the core of the post-crisis policy debate. This paper contributes to the debate by focusing on how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates. Its findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.

How Risky are Banks' Risk Weighted Assets? Evidence from the Financial Crisis
How Risky are Banks' Risk Weighted Assets? Evidence from the Financial Crisis

Author: Sonali Das

Publisher:

Published: 2015

Total Pages: 40

ISBN-13:

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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.