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Bank capital : lessons from the financial crisis

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  • Demirguc-Kunt, Asli
  • Detragiache, Enrica
  • Merrouche, Ouarda

Abstract

Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis. They differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the common equity ratio. They find several results: (i) before the crisis, differences in capital did not affect subsequent stock returns; (ii) during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) there is evidence that higher quality forms of capital, such as Tier 1 capital, were more relevant. They also examine the relationship between bank capitalization and credit default swap (CDS) spreads.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5473.

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Date of creation: 01 Nov 2010
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Handle: RePEc:wbk:wbrwps:5473

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Keywords: Banks&Banking Reform; Access to Finance; Debt Markets; Economic Theory&Research; Banking Law;

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  1. João A. C. Santos, 2000. "Bank capital regulation in contemporary banking theory: a review of the literature," BIS Working Papers 90, Bank for International Settlements.
  2. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  3. Cameron, A. Colin & Gelbach, Jonah B. & Miller, Douglas L., 2011. "Robust Inference With Multiway Clustering," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 238-249.
  4. Jan Ericsson & Kris Jacobs & Rodolfo A. Oviedo, 2004. "The Determinants of Credit Default Swap Premia," CIRANO Working Papers 2004s-55, CIRANO.
  5. Asli Demirgüç-Kunt & Luis Servén, 2010. "Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro- and Financial Policies," World Bank Research Observer, World Bank Group, vol. 25(1), pages 91-124, February.
  6. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis," NBER Working Papers 15207, National Bureau of Economic Research, Inc.
  7. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  8. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
  9. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
  10. Ouarda Merrouche & Erlend Nier, 2010. "What Caused the Global Financial Crisis," IMF Working Papers 10/265, International Monetary Fund.
  11. Luigi Zingales, 2011. "A New Capital Regulation for Large Financial Institutions," American Law and Economics Review, Oxford University Press, vol. 13(2), pages 453-490.
  12. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  13. Keeley, Michael C. & Furlong, Frederick T., 1990. "A reexamination of mean-variance analysis of bank capital regulation," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 69-84, March.
  14. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  15. Hui Tong & Shang-Jin Wei, 2009. "The Composition Matters," IMF Working Papers 09/164, International Monetary Fund.
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