How Does Capital Affect Bank Performance during Financial Crises?
Allen N. Berger and
Christa H. S. Bouwman
Additional contact information
Allen N. Berger: University of SC and Wharton Financial Institutions Center, University of PA
Christa H. S. Bouwman: Case Western Reserve University and Wharton Financial Institutions Center, University of PA
Working Papers from University of Pennsylvania, Wharton School, Weiss Center
The recent financial crisis has raised important issues regarding bank capital. Various reform proposals involve requiring banks to hold more capital. But assessing these proposals requires an understanding of how capital affects bank performance. Existing theories produce conflicting predictions regarding the effect of capital on bank performance during normal times and have little to say about the effect during financial crises. This paper addresses these issues empirically by formulating and testing hypotheses regarding the effect of capital on three dimensions of bank performance - survival, market share, and profitability - during financial crises and normal times. We distinguish between two banking crises and three market crises that occurred in the U.S. over the past quarter century. We have two main results. First, capital helps banks of all sizes during banking crises. Higher capital helps these banks increase their probability of survival, market share, and profitability during such crises. Second, higher capital improves the performance of small banks in all three dimensions during market crises and normal times as well, but the effect on medium and large banks during these periods is less pronounced. Overall, our results suggest that capital is important for small banks at all times and is important for medium and large banks primarily during banking crises.
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
References: Add references at CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed
Downloads: (external link)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://fic.wharton.upenn.edu/fic/papers/11/11-22.pdf [301 Moved Permanently]--> https://wifpr.wharton.upenn.edu/fic/papers/11/11-22.pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:11-22
Access Statistics for this paper
More papers in Working Papers from University of Pennsylvania, Wharton School, Weiss Center Contact information at EDIRC.
Bibliographic data for series maintained by ().