Riskiness of Commercial Banks and Basel II Norms—Evidence from India

Abstract

The objective is to understand the riskiness of Indian banks using risk index and probability of insolvency across bank groups and also to understand the impact of Basel II norms on riskiness of banks in India. Overall risk of the Indian banks is captured through risk index suggested by Hannan and Hanweck ( 1988 ). The risk index is often referred to as the distance-to-default and the Z-score incorporates net income volatility, the level of returns and the amount of capital held in a single measure. Inclusion of capital in the measure is important as it serves as a buffer against failure. The article provides empirical insights about the impact of Basel II norms on riskiness of Indian banks. It is found that foreign banks have least riskiness followed by state bank group, nationalised banks and private banks. The riskiness of Indian banking industry has decreased the probability of insolvency after implementation of Basel norms. The article includes implications for the banks to understand degree of riskiness for a bank with reference to a bank group and entire banking industry. This article fulfils an identified need to study how Basel II norms affected riskiness of Indian banks and relative riskiness of the bank groups.