Bank capital: lessons from the financial crisis

Asli Demirguc-Kunt, Enrica Detragiache () and Ouarda Merrouche ()

No 5473, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Banks&Banking Reform; Access to Finance; Debt Markets; Economic Theory&Research; Banking Law (search for similar items in EconPapers)
Date: 2010-11-01
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (40)

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Related works:
Journal Article: Bank Capital: Lessons from the Financial Crisis (2013)
Journal Article: Bank Capital: Lessons from the Financial Crisis (2013)
Working Paper: Bank Capital: Lessons From the Financial Crisis (2010)
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