The Impact of the Euro on Risk Exposure of the World's Major Banking Industries

43 Pages Posted: 7 Sep 2004

See all articles by Bill B. Francis

Bill B. Francis

University of South Florida - College of Business Administration

Delroy M. Hunter

University of South Florida

Abstract

In this paper, we examine if the introduction of the euro impacted the risk exposures, risk premiums and, hence, the cost of equity of the banking industry of 11 Eurozone countries, five non-Eurozone European countries, and three non-European countries. Using a multi-factor asset-pricing model that allows time variation in the risk exposures, we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro. Though we find an increase in the market and currency exposures after the euro, consistent with increased competition among banks, the fall in the cost of equity arises from an economically large decline in the currency premium. As expected, the Eurozone banking industry experienced the largest decrease. Our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector.

Keywords: Euro currency risk, exchange rate exposure, bank exposure, currency risk premium, expected returns, cost of equity

JEL Classification: C32, F31, G12, G15, G21

Suggested Citation

Francis, Bill B. and Hunter, Delroy M., The Impact of the Euro on Risk Exposure of the World's Major Banking Industries. Available at SSRN: https://ssrn.com/abstract=586529

Bill B. Francis (Contact Author)

University of South Florida - College of Business Administration ( email )

4202 E. Fowler Avenue, BSN 3403
Dept. of Finance
Tampa, FL 33620-5500
United States
813-974-6300 (Phone)
813-974-3030 (Fax)

HOME PAGE: http://www.coba.usf.edu/departments/finance/facult

Delroy M. Hunter

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
813-974-6319 (Phone)

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