Bank Capital: Lessons from the Financial Crisis
World Bank - Financial and Private Sector Development; World Bank
International Monetary Fund (IMF) - European Department
November 1, 2010
World Bank Policy Research Working Paper No. 5473
Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis. They differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the common equity ratio. They find several results: (i) before the crisis, differences in capital did not affect subsequent stock returns; (ii) during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized 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) there is evidence that higher quality forms of capital, such as Tier 1 capital, were more relevant. They also examine the relationship between bank capitalization and credit default swap (CDS) spreads.
Number of Pages in PDF File: 34
Keywords: Banks & Banking Reform, Access to Finance, Debt Markets, Economic Theory & Research, Banking Law
Date posted: November 14, 2010
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