Perspective on Bank Capital Adequacy: Time-Series Analysis

97 Pages Posted: 14 Jan 2001 Last revised: 6 Sep 2010

See all articles by William F. Sharpe

William F. Sharpe

Stanford University - Graduate School of Business

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center

Date Written: May 1978

Abstract

The first part of this paper provides a historical perspective on bank risks. Five-year moving average measures of total risk, market risk, and nonmarket risk are computed for an index of New York banks from 1929-1975 and for an index of outside New York banks from 1950-1976.We use a carefully constructed series of bank balance sheet data to compute correlations among various components of New York banks' port-folios and observe trends over time. The time series relationship between book values and market values is investigated, and classical measures of capital adequacy are calculated using surrogates for market values rather than book values. Finally, data are presented on the movement of interest rates and the term structure over time. Serial correlations and cross-correlations are computed. The second part of the paper uses the technique proposed in Sharpe ("Bank Capital Adequacy, Deposit Insurance and Security Values," June 1978) to gain information about capital adequacy. He has shown that for a bank with deposit liabilities that do not extend beyond the review period a "value preserving spread" in asset risk is likely to increase the value of capital. Moreover, the less adequate the capital, the larger this effect should be. We outline the method used to develop an econometric model to test for this effect. The model is then applied to time series data from 1938 to 1975.

Suggested Citation

Sharpe, William F. and Goodman, Laurie S., Perspective on Bank Capital Adequacy: Time-Series Analysis (May 1978). NBER Working Paper No. w0247, Available at SSRN: https://ssrn.com/abstract=252194

William F. Sharpe (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-725-4876 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.wsharpe.com

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center ( email )

2100 M Street NW
Washington, DC 20037
United States

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