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Bank Capital: Lessons from the Financial Crisis
Author(s) -
DEMIRGUCKUNT ASLI,
DETRAGIACHE ENRICA,
MERROUCHE OUARDA
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12047
Subject(s) - capital adequacy ratio , debt to capital ratio , financial crisis , capital requirement , basel iii , business , stock (firearms) , cost of capital , risk adjusted return on capital , leverage (statistics) , monetary economics , tier 1 network , financial system , financial capital , economics , equity ratio , finance , equity capital markets , private equity , capital formation , human capital , macroeconomics , economic growth , world wide web , computer science , engineering , microeconomics , profit (economics) , the internet , machine learning , mechanical engineering , incentive
Using a multicountry panel of banks, we study whether better capitalized banks experienced higher stock returns during the financial crisis. We differentiate among various types of capital ratios: the Basel risk‐adjusted ratio, the leverage ratio, the Tier 1 and Tier 2 ratios, and the tangible equity ratio. We find several results: (i) before the crisis, differences in capital did not have much impact on stock returns; (ii) during the crisis, a stronger capital position was associated with better stock market performance, most markedly for larger 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) higher quality forms of capital, such as Tier 1 capital and tangible common equity, were more relevant.