RDP 9302: A Decade of Australian Banking Risk: Evidence from Share Prices 6. Conclusion

This paper has presented a contingent claim model of a bank which allows us to use share price data to derive estimates of the variability of the rate of return on bank assets, the economic value of bank capital and the contingent liability that might be thought to be associated with the deposit protection conditions of the Banking Act.

Apart from the isolated incident of the 1987 share market crash, the deposit protection liability was found to be negligible during the sample period. The riskiness of banks, as measured by the volatility of the rate of return on assets, was not found to have increased significantly over the past ten years. Banks' market capital-asset ratios have risen during this time.

Investigation of the correlation between asset volatility and the capital-asset ratio across time and across banks suggests that increases in the riskiness of banks' assets are accompanied by increases in bank capital. We intend to investigate this issue further by testing the nature of the causal relation between these two variables using a vector autoregressive framework.

The ambit of this work could be extended by looking at the riskiness of building societies. Although only one building society, the Co-operative Building Society, has been listed on the Australian Stock Exchange for any length of time, shares in a number of societies are traded through the building societies themselves or through select brokers.