An empirical investigation of bank risk

Haq, M 2010, An empirical investigation of bank risk, Doctor of Philosophy (PhD), Economics Finance and Marketing, RMIT University.


Document type: Thesis
Collection: Theses

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Title An empirical investigation of bank risk
Author(s) Haq, M
Year 2010
Abstract This thesis examines the determinants of bank equity risk and credit risk as well as providing an analysis of the change in bank equity risk following the formation of Economic and Monetary Union (EMU). It is motivated by the increasing interest in bank risk research particularly since the formation of EMU and the global financial crisis.

The study considers a range of financial institutions across 36 countries from the period of 1995-2006. In terms of methodology, the primary estimation method for the regression equations was pooled-OLS and two stage least squares (2SLS) with robust standard errors. The robustness of the findings was also tested by other estimation methods such as random effects and fixed effects panel data analysis.

The findings on European bank analysis show: (i) off-balance sheet activities are positively associated with equity risk (total risk, systematic risk and idiosyncratic risk) and credit risk; (ii) charter value is positively associated with equity risk but negatively related to credit risk; (iii) bank capital is non-linearly related with systematic risk and credit risk; (iv) uninsured deposits are negatively associated with systematic risk while positively related to credit risk, total risk and idiosyncratic risk; (v) large banks exhibit greater systematic risk and total risk but lower credit risk and idiosyncratic risk. While these bank characteristics are important in explaining bank risk, the findings also confirm that civil-law country banks tend to be less risky than common-law country banks over the period of the study. Similar findings are also evident in separate world and regional analysis.

As to the possibility of structural change between the pre-EMU and post-EMU periods, the results show the magnitude of charter value fell dramatically in the post-EMU period with regard to equity risk and credit risk. The findings generally show an increase in the importance of off-balance sheet activities in the post-EMU period. These results were robust to various estimation specifications.

In addition, the findings reveal that, with the exception of Germany, there was a decline in bank risk across the euro zone countries. Total risk decreased for 70% of the euro zone banks with a statistically significant decline in total risk observed for 51 % of the sample. A similar result is evident for systematic risk and idiosyncratic risk. These findings are robust to financial crisis effect and test specifications. Moreover, this study finds evidence of a decrease in bank equity risk for a sample of neighbouring non-euro zone European countries, consistent with the existence of some spill-over effects.

This study contributes to the existing bank risk literature by showing that bank regulation, off-balance sheet activities and market discipline are important determinants of bank equity risk and credit risk. In addition, it is one of the first studies to provide evidence of changes in the importance of factors affecting bank risk between the pre-and post-EMU periods. This is also one of the first studies to provide empirical evidence of bank capital non-linearity for European banks as well as for the broader world bank analysis.
Degree Doctor of Philosophy (PhD)
Institution RMIT University
School, Department or Centre Economics Finance and Marketing
Keyword(s) Bank risk
bank capital
charter value
off-balance sheet activities
cross country analysis
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Created: Mon, 09 Dec 2013, 09:05:30 EST by Brett Fenton
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