Working Paper: NBER ID: w23287
Authors: Scar Jord; Bjrn Richter; Moritz Schularick; Alan M. Taylor
Abstract: What is the relationship between bank capital, the risk of a financial crisis, and its severity? This paper introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus between capital structure and financial instability. We find no association between higher capital and lower risk of banking crisis. However, economies with better capitalized banking systems recover faster from financial crises as credit begins to flow back more readily.
Keywords: Bank Capital; Financial Crises; Liquidity
JEL Codes: E44; G01; G21; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher capital ratios (G32) | Lower risk of banking crises (F65) |
| Lower capital ratios (G32) | Heightened crisis risks (H12) |
| Bank capital (G21) | Future bank stock returns (G17) |
| Credit expansions (E51) | Crisis likelihood (H12) |
| Higher capital ratios (G32) | Milder recessions (E32) |
| Higher capital ratios (G32) | Quicker recoveries from financial crises (F65) |