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Bank Capital Redux: Solvency, Liquidity, and Crisis

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  • Jord�, �scar
  • Richter, Bj�rn
  • Schularick, Moritz
  • Taylor, Alan M.

Abstract

Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies between 1870 and 2013 and for the post-WW2 period, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks' balance sheets in 17 countries. A solvency indicator, the capital ratio has no value as a crisis predictor; but we find that liquidity indicators such as the loan-to-deposit ratio and the share of non-deposit funding do signal financial fragility, although they add little predictive power relative to that of credit growth on the asset side of the balance sheet. However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital.

Suggested Citation

  • Jord�, �scar & Richter, Bj�rn & Schularick, Moritz & Taylor, Alan M., 2017. "Bank Capital Redux: Solvency, Liquidity, and Crisis," CEPR Discussion Papers 11934, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11934
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    References listed on IDEAS

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    Cited by:

    1. Alfred Duncan & Charles Nolan, 2017. "Financial Frictions in Macroeconomic Models," Studies in Economics 1719, School of Economics, University of Kent.

    More about this item

    Keywords

    bank liabilities; capital ratio; crisis prediction; Financial crises; local projections;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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