Strengthening Bank Stability after the Crisis
48 Pages Posted: 30 Jun 2021 Last revised: 12 Aug 2021
Date Written: June 20, 2021
During normal times, strengthening the financial stability of banks is associated with contradictory effects on returns. In this paper, we establish that liquidity and capital ratios had a positive impact on bank returns during the first three years following the global financial crisis. Our results are robust to different endogeneity and robustness tests. We identify deposit franchise and risk management as two key channels through which stronger financial stability improved bank returns. Our study contributes to a better understanding of the time- varying effects of financial stability and of the benefits of liquidity and capital ratios during normal times and not only in crisis periods.
Keywords: Bank Stability, Global financial crisis, Liquid assets, Capital ratios
JEL Classification: G01, G21, G28, G30, G32, G33
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