Determinants of bank risk

Abstract

In recent years, the Korean Banking industry has undergone fundamental changes through the implementation of strong reforms to enhance the stability of the financial system. Various policies introduced concurrently and consecutively by the regulatory authorities enables a comprehensive study on determinants of bank risks. The purpose of this paper is to empirically examine the effect of each policy``s variables on the nature of bank risk-taking. Using sample data issued by Korean commercial banks from the first-half fiscal 1995 to the last-half 2000 and estimating the panel data regressions, this paper examines the determinants of bank risk. This paper uses six risk measures: idiosyncratic risk, systematic risk, market risk, and interest rate risk which are based on two-factor market model, in addition to total risk and insolvency risk. The results indicate that BIS capital ratio and the appointment of outside directors and an audit committee has a negative relationship with bank risk, respectively; while bailout, foreign shareholders`` ownership, the daily price limit, the introduction of Internet banking services, and the implementation of deposit insurance, all have a positive relationship with bank risk, respectively. In addition, franchise value, M&A, and the establishment of foreign bank branches has an insignificant effect on bank risk.