The Determinants of the Riskiness of Banks
The authors argue that settling the issue of what reforms are required must be based on empirical evidence. They first set out the key bank risks, including those associated with collateralised agreements at the heart of complexity and interdependence problems. They point out that in normal times these risk positions mostly cancel out (one’s loss being another’s gain), but when risk is mispriced these positions become pro-cyclical, correlated and concentrated activities involving chains of counterparties that create interconnectedness risk. The authors choose bank distance-to-default (DTD) data as their dependent variable and show that 4 business model features have a much stronger impact on risk than any capital rule: the size of (un-netted) derivatives, the extent wholesale securities financing, the availability of liquid assets and a measure of interdependence.
- Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637.Google Scholar
- Blundell-Wignall, A., Atkinson, P. E., & Roulet, C. (2013). Bank Business Models and the Separation Issue. OECD Journal, Financial Market Trends, 2012(2), 1–23.Google Scholar
- Dodd-Frank. (2010). Wall Street Reform and Consumer Protection Act (see US Congress).Google Scholar
- Haldane, A. (2012). The Dog and the Frisbee. Speech Given at the Federal Reserve Bank of Kansas City’s 36th Economic Policy Symposium, The Changing Policy Landscape, Jackson Hole, WY.Google Scholar
- Mnuchin, S. T., & Phillips, C. S. (2017). A Financial System That Creates Economic Opportunities: Banks and Credit Unions. US Department of the Treasury.Google Scholar