Bank Capital: Lessons from the Financial Crisis

34 Pages Posted: 20 Apr 2016  

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Ouarda Merrouche

World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2010

Abstract

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.

Keywords: Banks & Banking Reform, Access to Finance, Debt Markets, Economic Theory & Research, Banking Law

Suggested Citation

Demirgüç-Kunt, Asli and Detragiache, Enrica and Merrouche, Ouarda, Bank Capital: Lessons from the Financial Crisis (November 1, 2010). World Bank Policy Research Working Paper No. 5473. Available at SSRN: https://ssrn.com/abstract=1707232

Asli Demirgüç-Kunt (Contact Author)

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Enrica Detragiache

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ouarda Merrouche

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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