We show that banks' risk exposure in one asset category affects how they report regulatory risk weights for another asset category. Specifically, banks report lower credit risk weights for their loan portfolio when they face higher risk exposure in their trading book. This relationship is...

The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an...

Modern bank management comprises both classical lending business and transfer of asset risk to capital markets through securitization. Sound knowledge of the risks involved in securitization transactions is a prerequisite for solid risk management. This paper aims to resolve a part of the...

We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency risk. In this model, banks face taxation, flotation costs of securities, and default costs and maximize shareholder value by making their financing, liquid asset holdings, and...

Conventional wisdom in banking argues that diversification tends to reduce bank risk and improve performance, but the recent financial crisis suggests that aggressive diversification strategies may have resulted in increased risk taking and poor performance. This paper addresses this important...

This article investigates how recent failures of seven publicly-traded commercial banks and the banking crises of 2008 affect the wealth, the systematic and nonsystematic risk, and total risk of commercial banks. We find that the total risk of medium-sized banks is slightly more affected by the...

This paper deals with the relation between excessive risk taking and capital structure in banks. Examining a quarterly dataset of U.S. banks between 1993 and 2010, we find that equity is valued higher when more risky portfolios are chosen when leverage is high, and that more risk taking has a...

Using supervisory data for US banks, we evaluate the alignment of Basel II/III AIRB (Advanced Internal Ratings Based) risk estimates with portfolio risk. We use loan performance as a direct measure of portfolio risk as well as less direct market-based measures. Our results document that loan...

Syndicated loans provide an exceptional opportunity to study differences in banks' approaches to measuring risk because many of these loans are held by more than one bank. We study differences in banks' estimates of risk parameters used to calculate regulatory capital requirements for syndicated...