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Bank Capital Redux: Solvency, Liquidity, and Crisis

Listed author(s):
  • Òscar Jordà
  • Björn Richter
  • Moritz Schularick
  • Alan M. Taylor

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23287.

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Date of creation: Mar 2017
Handle: RePEc:nbr:nberwo:23287
Note: DAE EFG ME
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