Are regulatory capital adequacy ratios good indicators of bank failure? Evidence from US banks

Heba Abou-El-Sood

International Review of Financial Analysis, 2016, vol. 48, issue C, 292-302

Abstract: Motivated by massive bank failures during the financial crisis, this paper examines whether capital adequacy ratios required by regulators are associated with bank failure. It investigates whether the association is affected by the bank's proximity to the minimum required capital ratios. If results show a significant association between regulatory capital and failure of banks falling below the minimum capital ratios, then the ratios are set at an adequate level. Examining a sample of 560 US bank holding companies for the period 2003–2009, results reveal that the association between the core (Tier 1) capital ratio and bank failure becomes significant only if the bank holding company has a Tier 1 capital ratio of less than 6%. This is the level below which US bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007–2009, there is a significant association only when the criterion is set at or above 8%. Market-based probability of default is more significantly associated with failure relative to Tier 1 capital ratio. The findings of this paper are relevant to regulatory policy discussions and Basel III deliberations on capital adequacy at times of financial turmoil.

Keywords: Failure; Regulatory capital adequacy; Bank holding companies; Distress; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 G33 G38 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105752191500201X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:48:y:2016:i:c:p:292-302

DOI: 10.1016/j.irfa.2015.11.011

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().