International capital standards, bank portfolios and bank stock risk

Abstract

The results suggest that the composition of bank portfolios affect the market risk (beta) of bank stock returns. In particular, the 20% asset category, which primarily includes government agency securities is associated with increases in market risk, indicating assets in this category are exposed to higher interest rate risk and prepayment risk. The market risk is lower for those institutions who concentrate on one-to-four family residential mortgages, suggesting home mortgages are well collateralized assets with low perceived credit risk. The off-balance sheet activities on average exhibit no significant impact on market risk. The results also suggest that the market perception of the insurer's expected liability is heavily influenced by Tier 1 capital ratio.