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How well capitalized are well-capitalized banks?

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Author Info
Joe Peek
Eric S. Rosengren

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Abstract

The wave of bank and savings and loan failures in the 1980s and early 1990s, and the resulting losses to deposit insurance funds, served to highlight the need for banks to hold sufficient capital to survive difficult times. In addition, many argued that deposit insurance reduces the market discipline that depositors might otherwise provide. Consequently, recent bank regulatory initiatives increasingly have emphasized the role of bank capital as a cushion to allow banks to absorb adverse shocks without experiencing insolvency.> While regulations are being designed to reward banks that are deemed to be well capitalized and restrict those that are not, no clear consensus has been reached in the academic literature on just how much capital is necessary. This article examines whether institutions satisfying the "well-capitalized" criteria before and during the recent banking crisis in New England had sufficient capital to weather the storm. The authors find that many of the institutions that either failed or required substantial supervisory intervention were well capitalized prior to the emergence of banking problems in New England. Problems of the magnitude recently experienced in New England would require greater capital cushions than the minimum "well-capitalized" prompt corrective action threshold, if widespread bank insolvencies were to be avoided.

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Publisher Info
Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1997)
Issue (Month): Sep ()
Pages: 41-50
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Handle: RePEc:fip:fedbne:y:1997:i:sep:p:41-50

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Related research
Keywords: Bank capital;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings, Federal Reserve Bank of Chicago, pages 502-520.
  2. Allen N. Berger & Gregory F. Udell, 1993. "Did risk-based capital allocate bank credit and cause a credit crunch in the U.S.?," Finance and Economics Discussion Series 93-41, Board of Governors of the Federal Reserve System (U.S.).
    Other versions:
  3. R. Alton Gilbert, 1993. "Implications of annual examinations for the Bank Insurance Fund," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 35-52. [Downloadable!]
  4. Hall, B.J., 1993. "How Has the Basle Accord Affected Bank Portfolios?," Harvard Institute of Economic Research Working Papers 1642, Harvard - Institute of Economic Research.
  5. Peek, Joe & Rosengren, Eric, 1995. "The Capital Crunch: Neither a Borrower nor a Lender Be," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 625-38, August. [Downloadable!] (restricted)
    Other versions:
  6. Frederick T. Furlong, 1992. "Capital regulation and bank lending," Economic Review, Federal Reserve Bank of San Francisco, pages 23-33. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arturo Estrella & Sangkyun Park & Stavros Peristiani, 2000. "Capital ratios as predictors of bank failure," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 33-52. [Downloadable!]
  2. Antonio Forte & Giovanni Pesce, 2009. "The International Financial Crisis: an Expert Survey," series 0024, Dipartimento di Scienze Economiche - Università di Bari, revised Apr 2009. [Downloadable!]
  3. Larry D. Wall & Pamela P. Peterson, 1998. "The choice of capital instruments," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-17. [Downloadable!]
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This page was last updated on 2009-12-9.

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