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Monitoring the “invisible” hand of market discipline: Capital adequacy revisited

Iftekhar Hasan (), Akhtar Siddique and Xian Sun

Journal of Banking & Finance, 2015, vol. 50, issue C, 475-492

Abstract: The recent U.S. financial crisis and governmental bailout of financial institutions have intensified the debate on the need for effectively measuring and monitoring the financial institutions’ risks. This paper contributes to this discussion by introducing a market-based capital measurement that better captures the dynamics of bank risk and returns. Evidence confirms that these market-based capital adequacy metrics are much more sensitive to risk factors and more responsive to economic events than the traditional accounting/regulatory report based capital models, which often underestimate the true capital needs. The CDS premia, another market-bases solvency measure, seems to overreact to declines in capital adequacy.

Keywords: Capital adequacy; Asset-pricing; Bank risk (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jbfina:v:50:y:2015:i:c:p:475-492