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How well capitalized are well-capitalized banks?

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Author Info

  • Joe Peek
  • Eric S. Rosengren

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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Bibliographic 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

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  1. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, December.
  2. Allen Berger & Gregory Udell, 1994. "Did Risk-Based Capital Allocate Bank Credit and Cause a `Credit Crunch' in the U.S.?," Center for Financial Institutions Working Papers 94-07, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. 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.
  4. Frederick T. Furlong, 1992. "Capital regulation and bank lending," Economic Review, Federal Reserve Bank of San Francisco, pages 23-33.
  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.
  6. 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.
  7. Diana Hancock & James A. Wilcox, 1992. "The effect on bank assets of business conditions and capital shortfalls," Proceedings 373, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. 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.
  2. 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.
  3. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks," Working Papers hal-00918577, HAL.
  4. Antonio Forte & Giovanni Pesce, 2009. "The International Financial Crisis: an Expert Survey," series 0024, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Apr 2009.

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