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Evaluating large bank risk using stock market measures in the Basel III period

Evaluating large bank risk using stock market measures in the Basel III period

Song, Guoxiang (2022) Evaluating large bank risk using stock market measures in the Basel III period. Journal of Corporate Accounting and Finance, 2022. pp. 1-12. ISSN 1044-8136 (Print), 1097-0053 (Online) (In Press) (doi:https://doi.org/10.1002/jcaf.22579)

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Abstract

There is a puzzle in the literature which seems to indicate that high capital levels introduced by Basel III increase bank risk. This paper attempts to solve this puzzle by investigating whether the risk of the eight U.S. global systemically important banks (GSIBs) increased in the Basel III period from previous periods. This paper uses case studies of the eight U.S. GSIBs to evaluate whether Basel III has changed their risk perceived by the market. Basel III has reduced the systematic risk of equity of U.S. GSIBs perceived by the stock market, and it does not explain the decline in return on equity (ROE) which may indicate some increase in large bank financial risk. The paper breaks down stock market measures into drivers which capture systematic risk of equity and other drivers which capture financial risk, and it finds new evidence which solves the puzzle in the literature on large bank risk. The findings of the paper help investors, creditors and regulators to have a clear understanding of the market perception of large bank risk. The paper provides new methods and evidence which could help regulators to assess the impact of Basel III on bank risk perceived by the market.

Item Type: Article
Uncontrolled Keywords: bank risk; Basel III; global systemically important banks; price-to-book ratio; price to earnings ratio; return on equity
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HF Commerce > HF5601 Accounting
Faculty / School / Research Centre / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Last Modified: 28 Jun 2022 16:19
URI: http://gala.gre.ac.uk/id/eprint/36763

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