A Regression Model of International Banking Risk and Risk Scoring (Simpson J. L.)

Bank Profitability Liquidity Ratings Risk-taking and Risk Management

Abstract This study re-appraises the relationship between international banking risk and primary bank balance sheet and accounts performance indicator data in liquidity, profitability and capitalisation. The investigation arrives at a basic analytical approach to international banking risk scoring. The model does not take non-financial related risk (subjective assessment) into consideration. Therefore its use is limited to overall financial related risk scoring. A performance indicator model of overall international banking risk is established. In this model, liquidity, as measured by a bank's prime asset ratio, is identified as an important short-term risk determinant. Bank capitalisation, as measured by bank net worth divided by total bank assets, is an important determinant of both long-term and overall international banking risk. This lends support to conventional accounting and finance (ratio analysis) theory except that profitability (return on net worth) is not a significant risk determinant.
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Libref/ Simpson J. L. (1998) "A Regression Model of International Banking Risk and Risk Scoring", Curtin U, Econ. & Finance Working Paper No. 98-02, pp. 1 - 24
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