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Bank Capital: Lessons from the Financial Crisis
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In this article, the authors study whether better capitalized banks fared better in terms of stock returns during the financial crisis and find that the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio, and there is evidence that higher quality forms of capital such as Tier 1 capital were more relevant.Abstract:
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.read more
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References
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Regulation of Bank Capital and Portfolio Risk
TL;DR: In this article, the authors examine the effect of portfolio reaction to capital requirements by investigating the impact of capital ratio regulation on the portfolio behavior of commercial banks and conclude that the results of a higher required capital-asset ratio in terms of the average probability of failure are ambiguous, while the intra-industry dispersion of the probability for failure unambiguously increases.
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Equity Volatility and Corporate Bond Yields
TL;DR: This paper explored the effect of equity volatility on corporate bond yields and found that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu.
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Robust Inference with Multi-Way Clustering
TL;DR: This article proposed a new variance estimator for OLS as well as for nonlinear estimators such as logit, probit and GMM, that provcides cluster-robust inference when there is two-way or multi-way clustering that is non-nested.
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The Determinants of Credit Spread Changes
TL;DR: In this article, the determinants of credit spread changes were investigated using straight industrial bonds with quoted prices, and the residuals from this first-pass regression were highly cross-correlated and principal components analysis strongly suggests they are driven by a single common factor.
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The Determinants of Credit Default Swap Premia
TL;DR: This paper investigated the relationship between theoretical determinants of default risk and actual market premia using linear regression and found that leverage, volatility and the risk free rate are important determinants for credit default swap premia, as predicted by theory.