Bank Capital: Lessons from the Financial Crisis

By Asli Demirgüç-Kunt, E. Detragiache, O. Merrouche. Social Science Research Network, 2010

581 citations recorded by the source corpus.

Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis. They differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the common equity ratio. They find several results: (i) before the crisis, differences in capital did not affect subsequent stock returns; (ii) during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) there is evidence that higher quality forms of capital, such as Tier 1 capital, were more relevant. They also examine the relationship between bank capitalization and credit default swap (CDS) spreads.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/585126d0fae5481991308fd7f058d00ee5a1d794

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Citations in the corpus

Bank Risk During the Financial Crisis: Do Business Models Matter? (2011, background): “Recent evidence suggests that when funding from financial markets became unavailable, or prohibitively expensive, the market valued more positively those institutions more heavily funded via customers’ deposits (Beltratti and Stultz, 2011; Demirguc-Kunt et al., 2010).”
How do banks react to catastrophic events? Evidence from Hurricane Katrina (2019, unknown): “Demirguc-Kunt et al. (2013) show that higher leverage and regulatory capital ratios are associated with better stock market performance during the financial crisis.”
Bank risk and performance in the MENA region: The importance of capital requirements (2016, unknown): “For instance, the usage of financial derivatives was the main reason behind the deterioration of asset quality that made many western banks illiquid, and negatively affected their performance once the subprime crisis emerged (Demirgüç-Kunt et al., 2013).”
Macroprudential policy and bank risk (2018, background): “In other words, pooling information regarding countries with different experiences in the use of macroprudential tools greatly reduces concerns about possible omitted variables (Demirguc-Kunt et al, 2013).”
The effect of capital ratios on the risk, efficiency and profitability of banks: Evidence from OECD countries (2017, unknown): “For instance, many of the banks bailed out by governments held adequate capital shortly before the crisis (Demirgüç-Kunt et al., 2013).”
The Limits of Model-based Regulation (2014, unknown): “As a consequence, market participants seem to lose faith in the meaning of risk-based capital ratios (Demirgüç-Kunt et al. 2013).”