Bank Capital: Lessons From the Financial Crisis

By Ouarda Merrouche, Enrica Detragiache, Asli Demirgüç-Kunt

December 1, 2010

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Format: Chicago

Ouarda Merrouche, Enrica Detragiache, and Asli Demirgüç-Kunt. Bank Capital: Lessons From the Financial Crisis, (USA: International Monetary Fund, 2010) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using a multi-country panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger 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) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.

Subject: Banking, Capital adequacy requirements, Financial crises, Financial institutions, Financial markets, Financial regulation and supervision, Loan loss provisions, Stock markets, Stocks

Keywords: Bank capital, Bank characteristic, Bank risk-taking, Basel capital accord, Capital adequacy requirements, Capitalized bank, Charter value, Financial crisis, Global, Large bank, Leverage ratio, Loan loss provisions, Preference shares, Stock markets, Stock return, Stocks, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/286
Stock No:

WPIEA2010286
ISBN:

9781455210930
ISSN:

1018-5941

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