Bank Capital: Lessons from the Financial Crisis

36 Pages Posted: 1 Feb 2011

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

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: December 2010

Abstract

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.

Keywords: Bank regulations, Banks, Capital, Cross country analysis, Economic models, Financial crisis, Global Financial Crisis 2008-2009, Risk management, Stock markets

Suggested Citation

Demirgüç-Kunt, Asli and Detragiache, Enrica and Merrouche, Ouarda, Bank Capital: Lessons from the Financial Crisis (December 2010). IMF Working Paper No. 10/286, Available at SSRN: https://ssrn.com/abstract=1751399

Asli Demirgüç-Kunt

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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