Bank Risk Strategies and Cyclical Variation in Bank Stock Returns

Baele, Lieven; Vennet, Rudi Vander; Landschoot, Astrid Van

doi:10.2139/ssrn.494303

Cited by 11 publications

(3 citation statements)

References 66 publications

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“…Such summary measures also assumes importance in view of the fact that the existing attempts of developing overall risk measures in the banking literature have been limited to market-based measures of risk drawing from stock market perception of the bank's riskiness (Pagano, 2001). Empirical studies have either considered market-based measures of risk (Baele et al, 2004 andBaele et al, 2007) or separate risk factors in isolation. A number of studies (Saunders et al, 1990;Schrand and Unal, 1998) in the banking literature have focused on risk taking behavior rather than risk management behavior.…”

Section: Introductionmentioning

confidence: 99%

Are bank stocks sensitive to risk management?

Sensarma

Jayadev

2009

The Journal of Risk Finance

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Sound risk management practice is the backbone of present day commercial banking. A bank has to manage several risks in the course of production and delivery of various financial services. This study attempts to summarize the information contained in bank financial statements on the diverse risks faced by banks and then ascertain whether stock markets respond to risk management behaviour. To this end, we compute risk management scores for Indian commercial banks for the period 1999-2006 by summarizing accounting ratios through the application of multivariate statistical techniques. Our computed scores show that risk management performance of banks has been improving over time with a recent drop in the last few years. Finally we examine whether returns on bank stocks are sensitive to the risk management scores developed in our study. The main finding is that banks with good risk management behaviour reward their shareholders with higher wealth. This work was supported by a grant from the Indian Institute of Management (Lucknow). An earlier version of this paper was accepted for presentation at the 12th Finsia-Melbourne Centre for Financial Studies Banking and Finance Conference. We gratefully acknowledge the useful comments received from an anonymous reviewer for the above conference and from G K Shukla. Any remaining errors are our responsibility. Commercial banking is a combination of different activities such as providing products and services to the customers, engaging in financial intermediation and management of risk. In recent years, risk management has received increasing focus as a central activity of commercial banks. The justification for studying banks" activities by focusing on risk management can be traced to Merton (1995) who argues that financial systems should be analyzed in terms of a "functional perspective" rather than an "institutional perspective" since over long periods of time functions have been much more stable than institutions. Given the importance of risk management in a bank"s functioning, the efficiency of risk management is expected to significantly influence its financial performance (Harker and 1 A functional perspective is based on the services provided by the financial system, such as providing a way to transfer economic resources through time. In contrast an institutional perspective is one where the central focus is on the activities of existing institutions such as banks and insurance companies. We chose Indian banking as the case study for our analysis. Our choice is driven by the recent emphasis on risk management in Indian banking driven by the Reserve Bank of India (RBI)"s guidelines as well as banks" own concerns. This recent emphasis can be attributed to several reasons. Prior to 1992, Indian banks were subject to a regime of strict control enforced by the RBI. A process of financial liberalization was initiated in 1992 to make the banking system profitable, efficient and resilient. The liberalization measures consisted of deregulation of entry, interest rates...

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Section: Introductionmentioning

confidence: 99%

Are bank stocks sensitive to risk management?

Sensarma

Jayadev

2009

The Journal of Risk Finance

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“…Staikouras et al (2000) and Staikouras and Wood (2003) show that diversification gives a limited contribution to banks' profit stabilization and risk reduction. However, market participants may perceive diversified banks more protected than specialized competitors against deteriorations in market conditions (Baele et al 2004).…”

Section: Literature Reviewmentioning

confidence: 99%

Rating Performance and Bank Business Models: Is There a Change with the 2007–2009 Crisis?

D’Apice¹,

Ferri

Lacitignola

2016

Ital Econ J

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We investigate the relationship between a bank’s rating and its business model and hypothesize that relationship changed through the crisis. We use bank ratings by Fitch, Moody’s and S&P’s from 2006 to 2009 and proxy the business model via an index given by a banks’ traditional income share in total income. In a sample of 241 listed banks from 39 countries, controlling for sovereign ratings and other bank characteristics, we find that banks with higher values of the index had: (1) similar ratings to other banks until 2007; (2) better rating performance through 2008–2009. The evidence supports our hypothesis

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“…Finally, there is some evidence that bank stock returns may vary with the business cycle. Baele, Vennet, and Landschoot (2005) use European data and …nd evidence of cyclical variation in bank stock returns and that banks that are better capitalised (higher equity to loan ratio) and more diversi…ed have higher returns than poorly capitalised less diversi…ed banks.…”

Section: Potential Determinants Of Bank Level Stock Returnsmentioning

confidence: 99%

What Drives EU Banks' Stock Returns? Bank-Level Evidence Using the Dynamic Dividend-Discount Model

2006

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We combine the dynamic dividend-discount model with an accountingbased vector autoregression framework that allows for a decomposition of EU banks' stock returns to cash- ‡ow and expected return news components. The main …ndings are that while the bulk of the variability of EU banks' stock returns is due to cash ‡ow shocks, the expected return shocks are relatively more important for larger than for smaller banks. Moroever, variables used in the literature as cash- ‡ow proxies explain a higher share of the cash- ‡ow component of the total excess returns for smaller than for larger EU banks. This suggests that large banks could be more prone to market wide news and events -that in the literature are associated with the expected return news component -as opposed to the bank-speci…c news, typically assumed to be incorporated in the cash- ‡ow component.

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Bank Risk Strategies and Cyclical Variation in Bank Stock Returns

Cited by 11 publications

References 66 publications

Are bank stocks sensitive to risk management?

Are bank stocks sensitive to risk management?

Rating Performance and Bank Business Models: Is There a Change with the 2007–2009 Crisis?

What Drives EU Banks' Stock Returns? Bank-Level Evidence Using the Dynamic Dividend-Discount Model

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