Bank Capitalization and the Cross-Section of Bank Stock Returns

36 Pages Posted: 19 Oct 2018

See all articles by Qiubin Huang

Qiubin Huang

University of Science and Technology Beijing - School of Economics and Management

Jakob de Haan

University of Groningen - Faculty of Economics and Business; De Nederlandsche Bank; CESifo (Center for Economic Studies and Ifo Institute)

Bert Scholtens

University of Groningen - Department of Finance & Accounting

Date Written: August 8, 2018

Abstract

We investigate the evolution of US bank capitalization and examine its role in the crosssection of bank stock returns. We use the book capital ratio (BCR), the market capital ratio (MCR) and the stressed capital ratio (SCR) as three proxies for bank capitalization and find that the MCR and the SCR have similar dynamics, while the BCR develops very differently. Our Fama-MacBeth cross-sectional regressions suggest a negative and significant relationship between bank capitalization and bank stock returns between 1994–2007, especially when bank capitalization is measured by the MCR or the SCR. We apply Fama-French factor models to estimate the risk-adjusted returns of our capital ratio-sorted decile portfolios and their sensitivities to systematic risk factors. We find that the BCR proxies for bank portfolio exposures to the market and value factors, while the MCR and the SCR contain some information on exposures to the market and size factors.

Keywords: bank capitalization, bank stock return, capital ratio, systemic banking crisis

JEL Classification: C54, G21, G28

Suggested Citation

Huang, Qiubin and de Haan, Jakob and Scholtens, Bert, Bank Capitalization and the Cross-Section of Bank Stock Returns (August 8, 2018). Available at SSRN: https://ssrn.com/abstract=3125882 or http://dx.doi.org/10.2139/ssrn.3125882

Qiubin Huang (Contact Author)

University of Science and Technology Beijing - School of Economics and Management

30 Xueyuan Road, Haidian District
Beijing, 100083
China

Jakob De Haan

University of Groningen - Faculty of Economics and Business ( email )

PO Box 800
Groningen, 9700 AV
Netherlands
+31 0 50 3633706 (Fax)

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Bert Scholtens

University of Groningen - Department of Finance & Accounting ( email )

P.O. Box 800
9700 AH Groningen
Netherlands

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