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Bank capital and systemic stability

Author

Listed:
  • Anginer, Deniz
  • Demirguc-Kunt, Asli

Abstract

This paper distinguishes among various types of capital and examines their effect on system-wide fragility. The analysis finds that higher quality forms of capital reduce the systemic risk contribution of banks, whereas lower quality forms can have a destabilizing impact, particularly during crisis periods. The impact of capital on systemic risk is less pronounced for smaller banks, for banks located in countries with more generous safety nets, and in countries with institutions that allow for better public and private monitoring of financial institutions. The results show that regulatory capital is effective in reducing systemic risk and that regulatory risk weights are correlated with higher future asset volatility, but this relationship is significantly weaker for larger banks. The paper also finds that increased regulatory risk-weights not correlated with future asset volatility increase systemic fragility. Overall, the results are consistent with the theoretical literature that emphasizes capital as a potential buffer in absorbing liquidity, information, and economic shocks reducing contagious defaults.

Suggested Citation

  • Anginer, Deniz & Demirguc-Kunt, Asli, 2014. "Bank capital and systemic stability," Policy Research Working Paper Series 6948, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6948
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    References listed on IDEAS

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    Cited by:

    1. Bitar, Mohammad & Saad, Wadad & Benlemlih, Mohammed, 2016. "Bank risk and performance in the MENA region: The importance of capital requirements," Economic Systems, Elsevier, vol. 40(3), pages 398-421.
    2. Luo, Yun & Tanna, Sailesh & De Vita, Glauco, 2016. "Financial openness, risk and bank efficiency: Cross-country evidence," Journal of Financial Stability, Elsevier, vol. 24(C), pages 132-148.
    3. Irresberger, Felix & Bierth, Christopher & Weiß, Gregor N.F., 2017. "Size is everything: Explaining SIFI designations," Review of Financial Economics, Elsevier, vol. 32(C), pages 7-19.
    4. repec:eee:ememar:v:35:y:2018:i:c:p:48-68 is not listed on IDEAS
    5. repec:eee:ecosys:v:41:y:2017:i:2:p:215-235 is not listed on IDEAS
    6. repec:eee:intfin:v:53:y:2018:i:c:p:227-262 is not listed on IDEAS
    7. repec:eee:finsta:v:31:y:2017:i:c:p:18-44 is not listed on IDEAS

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    Keywords

    Banks&Banking Reform; Access to Finance; Banking Law; Debt Markets; Financial Intermediation;

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