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Title: Modelling of corporate credit risk, banks' stock returns, and the effect of risk-based capital standards on the UK commercial banks
Author: Larose, Louis Rene Peter
Awarding Body: University of Birmingham
Current Institution: University of Birmingham
Date of Award: 2000
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Abstract:
This thesis is made up of three stand-alone research papers on the UK commercial banking. The first paper investigates how changes in the macroeconomic conditions, companies' liquidity position, and the financial market indicators affect corporate credit risk over different business cycles. The novelty of this study is that it uses a " total risk" model. The study employs a panel of 130 companies from fifteen industries which were listed on the London Stock Exchange for a period of 26 years. We use a logit estimation technique to conduct the empirical analysis. We find that the liquidity position of both high and low capital intensive companies is the key determinant in influencing credit risk especially when real GDP is in decline. Adverse changes in macroeconomic variables (e.g. inflation and interest rates) can also influence default risk in the long run. On the other hand, financial market variables provide mixed result. We also find that an increase in real GDP reduces the probability of default risk. The second paper examines the effect of changes in macroeconomic conditions, banks' specific, and financial market variables on UK banks' stock returns over the business cycle 1988-1997. A sample of 27 commercial banks (e.g. local and foreign) listed on the London Stock Exchange for a period of ten years was selected. We use a Generalised Method of Moments (GMM) estimation technique with a balanced panel data set to carry out our empirical analysis. This study also employs a " total risk " model, hence, an innovation over previous studies in this area. We find a positive unit change in banks' profitability (NPBT) variable increases local banks' stock returns by 9.7%, and the foreign banks by 12.6%. Meanwhile, a positive unit change in the portfolio risk for both local and foreign banks increase stock returns approximately by 0.01%. Likewise, a positive unit change in macroeconomic variables (e.g. inflation and interest rates) adversely affect the local and foreign banks' stock return. The financial market variable PE increases returns for the local banks by almost 1%. We also find that a positive unit change in real GDP accelerates banks' stock return by 1 %. The third research study concentrates on the risk-based capital (RBC) standards on the UK commercial banks capital-asset ratio and portfolio risk. A sample of 41 banks (e.g. local and foreign) operating in the UK was selected. The data set covers a period often years from 1988-1997. We use a GMM simultaneous equation model to estimate our empirical analysis. From our regression result, we compute an elasticity response of the independent variables on capital-asset ratio and portfolio risk. We find that a positive unit change by the size (e.g total assets), bank holding company (BHC), change in risk (APRISK), net profit after tax (NPAT), and taxation/income (TAXIN) variables decelerate changes in capita-asset ratio. A positive unit change in gearing (GER) variable accelerates changes in capital-asset ratio by 0.80%. On the other hand, a positive unit change by size, bank holding company (BHC), change in capital (ACAP), and non performing loans/total assets (NPLASS) variables decelerates portfolio risk. Gearing (GER) variable also accelerates portfolio risk by 14.76%. We conclude that the implementation of the RBC standards by the UK regulatory agency has been effective in achieving the aim of the Basle Accord in increasing capital and reduce portfolio risk.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID: uk.bl.ethos.633218  DOI: Not available
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