Capital ratios as predictors of bank failure
The current review of the 1988 Basel Capital Accord has put the spotlight on the ratios used to assess banks’ capital adequacy. This article examines the effectiveness of three capital ratios—the first based on leverage, the second on gross revenues, and the third on risk-weighted assets—in forecasting bank failure over different time frames. Using 1988-93 data on U.S. banks, the authors find that the simple leverage and gross revenue ratios perform as well as the more complex risk-weighted ratio over one- or two-year horizons. Although the risk-weighted measures prove more accurate in predicting bank failure over longer horizons, the simple ratios are less costly to implement and could function as useful supplementary indicators of capital adequacy.
Volume (Year): (2000)
Issue (Month): Jul ()
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References listed on IDEAS
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- Cole, Rebel A. & Gunther, Jeffery W., 1995.
"Separating the likelihood and timing of bank failure,"
Journal of Banking & Finance,
Elsevier, vol. 19(6), pages 1073-1089, September.
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- Wesley C. Mitchell, 1909. "The Decline in the Ratio of Banking Capital to Liabilities," The Quarterly Journal of Economics, Oxford University Press, vol. 23(4), pages 697-713.
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- Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June.
- Joe Peek & Eric S. Rosengren, 1997. "How well capitalized are well-capitalized banks?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 41-50. Full references (including those not matched with items on IDEAS)
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