We analyse how bank asset quality interacts within the relationship between leverage and systematic risk. We elaborate three leverage adjustments for sterilizing the effect of provisioning and incorporating the effect of non-performing loans and total credit risk exposure. We test the model on a sample of 97 European banks from 2005 and 2016. Controlling for size, findings show the relevance of a combined effect of leverage and asset quality as a systematic risk component. NPLs are found to be one significant variable of market risk. Results demonstrate that simple leverage is pointless for verifying the financial riskiness of banks.
Systematic risk and banks leverage: The role of asset quality
Beltrame, Federico;
2018-01-01
Abstract
We analyse how bank asset quality interacts within the relationship between leverage and systematic risk. We elaborate three leverage adjustments for sterilizing the effect of provisioning and incorporating the effect of non-performing loans and total credit risk exposure. We test the model on a sample of 97 European banks from 2005 and 2016. Controlling for size, findings show the relevance of a combined effect of leverage and asset quality as a systematic risk component. NPLs are found to be one significant variable of market risk. Results demonstrate that simple leverage is pointless for verifying the financial riskiness of banks.
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