Abstract

http://ssrn.com/abstract=2083732
 
 

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How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina


Claudia Lambert


Goethe University Frankfurt - Chair of Econometrics

Felix Noth


Otto-von-Guericke University

Ulrich Schuewer


Goethe University Frankfurt - Department of Finance

March 1, 2012

29th International Conference of the French Finance Association (AFFI) 2012

Abstract:     
The instability of banks during the recent financial crisis underlines the importance of understanding how banks determine their capital ratios. This paper conducts the first empirical assessment on how banks adjust their capital ratios following an exogenous shock to their asset risks. The existing literature, which uses non-experimental identfication, faces the diffculty that banks typically determine capital ratios and asset risks simultaneously. Using Hurricane Katrina as a natural experiment, we find that banks in the disaster areas increase their risk-based capital ratios after the hurricane. This finding shows that banks act precautious by themselves irrespective of regulatory requirements. However, when we examine low-capitalized and high-capitalized banks separately, we find that results are driven by high-capitalized banks. In addition, high-capitalized banks increase their risk-based capital ratios by decreasing loans and not by increasing capital.

Number of Pages in PDF File: 43

Keywords: financial crisis, bank regulation, capital requirements, natural experiment

JEL Classification: G21, G28

working papers series


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Date posted: October 9, 2012  

Suggested Citation

Lambert, Claudia and Noth, Felix and Schuewer, Ulrich, How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina (March 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: http://ssrn.com/abstract=2083732 or http://dx.doi.org/10.2139/ssrn.2083732

Contact Information

Claudia Lambert (Contact Author)
Goethe University Frankfurt - Chair of Econometrics ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
Felix Noth
Otto-von-Guericke University ( email )
Universitaetsplatz 2
Postfach 4120
Magdeburg, 39114
Germany
Ulrich Schuewer
Goethe University Frankfurt - Department of Finance ( email )
House of Finance
Grueneburgplatz 1
Frankfurt, 60323
Germany
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