Regulatory capital and bank risk-resilience amid the Covid-19 pandemic: How are the Basel reforms faring?

Makafui Anani and Felix Owusu

Finance Research Letters, 2023, vol. 52, issue C

Abstract: In this paper, we address a long-standing policy question of whether higher levels of regulatory capital, ex-ante, makes banks risk-resilient in times of severe economic downturns. Using the Covid-19 crisis as an exogenous shock to the banking system in a difference-in-difference setting, the results indicate that banks with robust pre-crisis regulatory capital ratios are less risky (have a lower insolvency risk) relative to less-capitalized banks amid the crisis period. Further analyses provides evidence consistent with the presence of a potential credit supply channel. Overall, the results suggests that the post 2007-09 Basel reforms have succeeded, to some extent, in strengthening the risk-resilience of banks during the Covid-19 economic fallout.

Keywords: Covid-19; Regulatory capital; Basel reforms; Bank insolvency risk; Government support (search for similar items in EconPapers)
JEL-codes: G01 G20 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s154461232200767x

DOI: 10.1016/j.frl.2022.103591

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