Document Type

Conference Proceeding

Publisher

World Business Institute Australia

Faculty

Faculty of Business and Law

School

School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre

RAS ID

12964

Comments

This article was originally published as: Allen, D. E., Boffey, R. R., & Powell, R. (2011). Survival of the fittest: contagion as a determinant of Canadian and Australian bank risk. Paper presented at the 2011 World Business Economics and Finance Conference. Bangkok, Thailand.

Abstract

The relative success of Australian and Canadian banks in weathering the Global Financial Crisis (GFC) has been noted by a number of commentators. Their earnings, capital levels and credit ratings have all been a source of envy for regulators of banks in Europe, America and the United Kingdom. The G-20 and the European Union have tried to identify the features of the Canadian and Australian financial systems which have underpinned this success in order to use them in shaping a revised international regulatory framework. Despite this perceived success, the impaired assets (also known as non-performing loans) of banks in both countries increased several fold over the GFC, and we investigate the determinants of this, using impaired assets as our measure of bank risk. Previous studies in other countries have tended to focus on the impact of bank specific factors, such as size and return on equity, in explaining bank risk. Our approach involves including those traditional variables, plus Distance to Default (DD), and a novel contagion variable, which is the effect of major global bank DD on Australian and Canadian banks. Using panel data regression over the period 1999-2008, we find that various balance sheet and income statement factors are not good explanatory variables for bank risk. In contrast, the contagion variable is significant in explaining Canadian and Australian bank risk, which suggests that prudential regulators should look to specifically allocate a portion of regulatory capital to deal with contagion effects.

 
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