The determinants of bank risks: Evidence from the recent financial crisis

Woon Sau Leung, Nick Taylor, Kevin Evans

Research output: Contribution to journalArticlepeer-review


We investigate whether US bank holding company fundamental characteristics are related to bank risk over a period that covers the recent 2007–09 financial crisis. We extend prior studies to consider bank equity risk exposure to market-wide default risk, the structured finance market, and the asset-backed money market in a variance decomposition. Four important results emerge: (1) the risk in bank opaque assets is not accurately priced; (2) banks with lower earnings have higher risk; (3) a positive relationship between non-performing loans and bank risk increased threefold during the crisis and (4) banks with a larger buffer of Tier 1 capital have lower risk and lower exposure to shocks in market-wide default risk and the structured finance market in particular. These results highlight the importance to investors of studying fundamentals, while from a bank regulatory perspective, effective management of regulatory capital may manage risks arising from contagion stemming from structured finance markets and funding illiquidity.
Original languageEnglish
Pages (from-to)277-293
JournalJournal of International Financial Markets, Institutions and Money
Publication statusPublished - Jan 2015


  • bank holding companies
  • bank equity risk
  • ABX index
  • funding illiquidity risk


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