Bank Capital Redux: Solvency, Liquidity, and Crisis

Moritz Schularick, Bjorn Richter, Alan Taylor and Oscar Jorda
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Bjorn Richter: University of Bonn

No 843, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Higher capital ratios are unlikely to prevent the next financial crisis. This is empirically true both for the pre-WW2 and the post-WW2 periods, and holds both within and between countries. We reach this startling conclusion using newly collected data on the liability side of banks’ balance sheets. Data coverage extends to 17 advanced economies from 1870 to 2013. 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.

Date: 2017
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba and nep-his
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Citations: View citations in EconPapers (45)

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Related works:
Journal Article: Bank Capital Redux: Solvency, Liquidity, and Crisis (2021)
Working Paper: Bank Capital Redux: Solvency, Liquidity, and Crisis (2021)
Working Paper: Bank Capital Redux: Solvency, Liquidity, and Crisis (2021)
Working Paper: Bank Capital Redux: Solvency, Liquidity, and Crisis (2017)
Working Paper: Bank Capital Redux: Solvency, Liquidity, and Crisis (2017)
Working Paper: Bank Capital Redux: Solvency, Liquidity, and Crisis (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:843

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