Publication: Bank Capital and Systemic Stability
Date
2014-06
ISSN
Published
2014-06
Author(s)
Abstract
This paper distinguishes among various
types of capital and examines their effect on system-wide
fragility. The analysis finds that higher quality forms of
capital reduce the systemic risk contribution of banks,
whereas lower quality forms can have a destabilizing impact,
particularly during crisis periods. The impact of capital on
systemic risk is less pronounced for smaller banks, for
banks located in countries with more generous safety nets,
and in countries with institutions that allow for better
public and private monitoring of financial institutions. The
results show that regulatory capital is effective in
reducing systemic risk and that regulatory risk weights are
correlated with higher future asset volatility, but this
relationship is significantly weaker for larger banks. The
paper also finds that increased regulatory risk-weights not
correlated with future asset volatility increase systemic
fragility. Overall, the results are consistent with the
theoretical literature that emphasizes capital as a
potential buffer in absorbing liquidity, information, and
economic shocks reducing contagious defaults.
Link to Data Set
Citation
“Anginer, Deniz; Demirguc-Kunt, Asli. 2014. Bank Capital and Systemic Stability. Policy Research Working Paper;No. 6948. © World Bank, Washington, DC. http://hdl.handle.net/10986/19377 License: CC BY 3.0 IGO.”
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