The off-balance sheet banking risk of large U.S. commercial banks

Off-Balance Sheet (OBS) activities of large U.S. commercial banks have been growing rapidly in recent years. These activities represented 58% of total bank assets in 1984 and grew to 176% of total bank assets in 1988. Bank regulators are concerned that OBS activities increase bank risk, and proposed that some OBS activities be included in the calculation of a risk-based capital requirement. This paper investigates the impact of OBS activities on market measures of risk. Specifically, this paper examines the risk-reducing diversification and risk-increasing effects of OBS activities by employing implied asset variances, in addition to, equity and systematic risks as proxies for market measures of bank risk. This research contends that asset variance is a better measure of risk for regulated banking industry. A Ronn-Verma (JF, 1986) option pricing methodology is employed to calculate implied asset variances. Systematic risk, equity risk and implied asset risk are regressed over various measures of OBS items and on balance measures of risk in a Pooled Cross-section and Time-series sample. The results indicate that OBS activities, in general, reduce total risk, but do not affect systematic risk. The explanatory powers of the models are improved significantly when implied asset variances, instead of equity variances, are used to proxy for total risk. Because regulators are concerned with total risk and probability of bank failure, the risk-reducing potential of OBS activities indicates that additional capital requirement of OBS activities will penalize large banks

An empirical investigation of the existence of market discipline of off-balance sheet banking risk

Bank regulators are concerned with the dramatic increase and risk exposure of Off-Balance Sheet (OBS) banking activities in recent years, and proposed that some OBS activities be included in the calculation of a risk-based capital requirement. This paper investigates the riskiness of OBS activities. Specifically, this paper reports on three capital market tests of OBS banking risk: the impact of OBS activities on the risk-premia of subordinated debt, on equity risk and on systematic risk of large commercial banks and bank holding companies. The underlying premise of this study is that the bank stockholders and subordinated debtholders are more exposed to the risk of bank failure resulting from OBS banking risk than insured and uninsured depositholders. If OBS activities are significantly related to market measures of bank risk, then market discipline of such activities exists. The empirical literature, to date, has ignored the impact of OBS banking risk on the default risk-premia borne by subordinated debtholders. The results indicate that most OBS activities reduce risk-premia and equity risk, but do not affect systematic risk. Both stockholders and subordinated debtholders price these OBS activities as risk-reducing. Therefore, regulatory interference in the form of additional capital requirement of OBS activities will penalize large commercial banks and will create distortions in the financial intermediation market

The off-balance sheet banking risk of large U.S. commercial banks

Off-Balance Sheet (OBS) activities of large U.S. commercial banks have been growing rapidly in recent years. These activities represented 58% of total bank assets in 1984 and grew to 176% of total bank assets in 1988. Bank regulators are concerned that OBS activities increase bank risk, and proposed that some OBS activities be included in the calculation of a risk-based capital requirement. This paper investigates the impact of OBS activities on market measures of risk. Specifically, this paper examines the risk-reducing diversification and risk-increasing effects of OBS activities by employing implied asset variances, in addition to, equity and systematic risks as proxies for market measures of bank risk. This research contends that asset variance is a better measure of risk for regulated banking industry. A Ronn-Verma (JF, 1986) option pricing methodology is employed to calculate implied asset variances. Systematic risk, equity risk and implied asset risk are regressed over various measures of OBS items and on balance measures of risk in a Pooled Cross-section and Time-series sample. The results indicate that OBS activities, in general, reduce total risk, but do not affect systematic risk. The explanatory powers of the models are improved significantly when implied asset variances, instead of equity variances, are used to proxy for total risk. Because regulators are concerned with total risk and probability of bank failure, the risk-reducing potential of OBS activities indicates that additional capital requirement of OBS activities will penalize large banks

Wireless Health Monitoring using Passive WiFi Sensing

This paper presents a two-dimensional phase extraction system using passive WiFi sensing to monitor three basic elderly care activities including breathing rate, essential tremor and falls. Specifically, a WiFi signal is acquired through two channels where the first channel is the reference one, whereas the other signal is acquired by a passive receiver after reflection from the human target. Using signal processing of cross-ambiguity function, various features in the signal are extracted. The entire implementations are performed using software defined radios having directional antennas. We report the accuracy of our system in different conditions and environments and show that breathing rate can be measured with an accuracy of 87% when there are no obstacles. We also show a 98% accuracy in detecting falls and 93% accuracy in classifying tremor. The results indicate that passive WiFi systems show great promise in replacing typical invasive health devices as standard tools for health care.Comment: 6 pages, 8 figures, conference pape

Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

This paper empirically examines the issue of market efficiency and time- varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk- return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative risk-return time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.

Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

This paper empirically examines the issue of market efficiency and time-varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk-return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative riskreturn time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.

Basel Capital Requirements and Bank Credit Risk Taking In Developing Countries;

Existing literature has focused attention on the impact of Basle I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of Shrieves and Dahl (1992). Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inverse