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Bank capital and systemic stability

Deniz Anginer () and Asli Demirguc-Kunt

No 6948, Policy Research Working Paper Series from The World Bank

Abstract: This paper distinguishes among various types of capital and examines their effect on system-wide fragility. The analysis finds that higher quality forms of capital reduce the systemic risk contribution of banks, whereas lower quality forms can have a destabilizing impact, particularly during crisis periods. The impact of capital on systemic risk is less pronounced for smaller banks, for banks located in countries with more generous safety nets, and in countries with institutions that allow for better public and private monitoring of financial institutions. The results show that regulatory capital is effective in reducing systemic risk and that regulatory risk weights are correlated with higher future asset volatility, but this relationship is significantly weaker for larger banks. The paper also finds that increased regulatory risk-weights not correlated with future asset volatility increase systemic fragility. Overall, the results are consistent with the theoretical literature that emphasizes capital as a potential buffer in absorbing liquidity, information, and economic shocks reducing contagious defaults.

Keywords: Banks&Banking Reform; Access to Finance; Banking Law; Debt Markets; Financial Intermediation (search for similar items in EconPapers)
Date: 2014-06-01
New Economics Papers: this item is included in nep-ban and nep-reg
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