Essays on understanding assumption and prevention of undesiderable bank risk

Résumé

Banking crises are a global phenomenon that have frequently affected developing and transitioning economies (Caprio and Klingebiel, 1997). Risk is an inherent factor of the banking business, and an unfortunate development of bank risk cannot always be avoided. Across recent banking crises we can observe how flaws of the banking regulation has affected the banking risk intake. For this reason, the financial regulation has evolved trying to close the gaps in international banking supervision. This thesis examines and aims to understand risk factors influencing the banks risk assumption under different conditions. Firstly, by looking at the banking risk factors in Latin America, a region which has experienced severed banking crises in the past. Secondly, and following the European sovereign debt crisis (Becker and Ivashina 2017; Ongena et al, 2019), we examine the risk factors that drive the sovereign exposure of small European Banks; Less Significant Institutions (LSI). Finally, we look at the upcoming banking regulation: The Fundamental Review of the Trading Book (FRTB), at this analysis we compare the risk measurement using the two different factors enabled by the regulation. Through the different papers we confirm firstly how in the case of Latin America, traditional commercial banks with good capitalization and liquidity are less risky. Secondly, that LSIs with strong credit quality and low capitalization are more disposed to increase LSI investment in sovereign debt. Finally, how the loose guidance on the inputs needed to calculate the DRC (Default risk Capital), within FRTB, might affect the bank risk exposure calculation.