Bank Capital in the Crisis: It’s Not Just How Much You Have but Who Provides It

Posted: 20 Jun 2016 Last revised: 9 Aug 2017

See all articles by Alexandre Garel

Alexandre Garel

Audencia Business School; Labex ReFi

Arthur Petit-Romec

SKEMA Business School; Université Côte d'Azur

Date Written: October 30, 2016

Abstract

Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank’s ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors.

Keywords: financial crisis, investor horizons, institutional investors, bank capital

JEL Classification: G01, G21, G23, G28, G32

Suggested Citation

Garel, Alexandre and Petit-Romec, Arthur, Bank Capital in the Crisis: It’s Not Just How Much You Have but Who Provides It (October 30, 2016). Journal of Banking & Finance 75 (2017): 152-166., Available at SSRN: https://ssrn.com/abstract=2797392 or http://dx.doi.org/10.2139/ssrn.2797392

Alexandre Garel

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

Labex ReFi ( email )

79 avenue de la République
Paris, 75011
France

Arthur Petit-Romec (Contact Author)

SKEMA Business School ( email )

Sophia Antipolis
France

Université Côte d'Azur ( email )

France

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
485
PlumX Metrics