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

AEA 2012 Annual Meeting Papers

43 Pages Posted: 16 Mar 2012 Last revised: 18 Apr 2012

See all articles by Claudia Lambert

Claudia Lambert

European Central Bank (ECB)

Felix Noth

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Ulrich Schüwer

Goethe University Frankfurt - Department of Finance; Leibniz Institute for Financial Research SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 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 identification, faces the difficulty 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.

Keywords: financial crisis, capital requirements, natural experiment

JEL Classification: G21, G28

Suggested Citation

Lambert, Claudia and Noth, Felix and Schüwer, Ulrich, How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina (March 1, 2012). AEA 2012 Annual Meeting Papers, Available at SSRN: https://ssrn.com/abstract=2022096 or http://dx.doi.org/10.2139/ssrn.2022096

Claudia Lambert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Felix Noth (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/asp/person.asp?fnh&Lang=e&Abteilung=fin

Ulrich Schüwer

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

HOME PAGE: http://www.wiwi.uni-frankfurt.de/de/abteilungen/finance/home.html

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://safe-frankfurt.de/

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