5 / 2016-09-09 18:20:14

New Perspectives on Bank Risk in Malaysia

This study explores bank risk in Malaysia over a ten year period using three metrics which include distance to default (DD), conditional distance to default (CDD) and non-performing loans (NPLs). Ten banks are examined split into two categories, small and large. The time series used includes the Global Financial Crisis. DD models measure risk based on the balance street structure of a company and fluctuations in their market asset values. DD is most often applied to the corporate customers of banks but has also been applied in the literature to banks themselves, which is the approach used in this study to measure capital erosion and bank risk. Conditional value at risk (CVaR) measures risk in the tail of a distribution, usually for assets such as stocks or interest rates. The study applies a CVaR type model to DD to measure conditional DD (CDD) based on extreme fluctuations in the market asset values of banks. The extent to which this tail risk of Malaysian banks changes over time, and whether this differs between smaller and larger banks, is examined.