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Bank capital : lessons from the financial crisis
 
Author:Demirguc-Kunt, Asli; Detragiache, Enrica; Merrouche, Ouarda; Collection Title:Policy Research working paper ; no. WPS 5473
Country:World; Date Stored:2010/11/10
Document Date:2010/11/01Document Type:Policy Research Working Paper
SubTopics:Access to Finance; Economic Theory & Research; Banks & Banking Reform; Debt Markets; Banking LawLanguage:English
Major Sector:FinanceRel. Proj ID:1W-The Crisis And Beyond: Fy11-Fy13 -- -- P122136;
Region:The World RegionReport Number:WPS5473
Sub Sectors:General finance sectorVolume No:1 of 1

Summary: Using a multi-country panel of banks, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis. They differentiate among various types of capital ratios: the Basel risk-adjusted ratio; the leverage ratio; the Tier I and Tier II ratios; and the common equity ratio. They find several results: (i) before the crisis, differences in capital did not affect subsequent stock returns; (ii) during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized banks; (iii) the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio; (iv) there is evidence that higher quality forms of capital, such as Tier 1 capital, were more relevant. They also examine the relationship between bank capitalization and credit default swap (CDS) spreads.

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