Banks are evaluated using both market risk measures and accounting information. The appropriate measure for assessment depends on its purpose and the conditions within which it is applied. A well-diversified investor considering adding a bank stock to a portfolio may use the bank’s market risk as measured by beta. On the other hand, a bank regulator assessing the financial health of a bank will provide a rating based on accounting variables.

The Asian banking crisis of 1997/1998 and its associated contagion effects highlights the need for a set of accounting and market risk measures that are applicable across countries. Research on Asian banks is important because they are the predominant source of finance for businesses in the private sector. Since alternative sources of funds are not available, when corporations encounter financial difficulties, the impact on the banks’ balance sheet may be greater than in countries with more developed financial markets.

This study examines the relation between accounting and capital market risk measures for 46 listed Asian banks during the period 1998-2003. The results indicate that Indonesia, Malaysia, South Korea, and Thailand were seriously impacted by the banking crisis, while Hong Kong, Pakistan, Philippines, Singapore, Sri Lanka, and Taiwan were less affected. As bank failure becomes more likely, firm-specific accounting risk becomes more important than market risk. Furthermore, the results are robust even though significant differences exist across these Asian countries in banking activities, capital adequacy requirements, and deposit insurance protection.