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Bank Capital and Risk: Cautionary or Precautionary?

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Listed:
  • Beverly Hirtle
  • Anna Kovner
  • James Vickery

Abstract

Do riskier banks have more capital? Banking companies with more equity capital are better protected against failure, all else equal, because they can absorb more losses before becoming insolvent. As a result, banks with riskier income and assets would hopefully choose to fund themselves with relatively more equity and less debt, giving them a larger equity cushion against potential losses. In this post, we use a top-down stress test model of the U.S. banking system?the Capital and Loss Assessment under Stress Scenarios (CLASS) model?to assess whether banks that are forecast to lose capital in a severe downturn do indeed have more capital, and how the relationship between capital and risk has evolved over time.

Suggested Citation

  • Beverly Hirtle & Anna Kovner & James Vickery, 2015. "Bank Capital and Risk: Cautionary or Precautionary?," Liberty Street Economics 20150202, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:87007
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    Keywords

    Bank Capital; Stress Testing; Financial Stability;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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