Regulatory Capital Adequacy Ratios and Bank Failure
Mon, 23 Nov 2015 10:22:00 GMT
Quantitative Analysis of Business, Economics and Finance Research Group Seminar
Are Regulatory Capital Adequacy Ratios Good Indicators of Bank Failure? Evidence from US Banks
Wednesday 9th December 1:15pm, Room BSG/08
Speaker: Dr Heba Abou-El-Sood (Cairo University)
All staff and student welcome
Motivated by massive bank failures during the financial crisis, this paper examines whether capital adequacy ratios required by regulators are significantly associated with bank failure. It investigates whether the association is affected by the bank’s proximity to the minimum required capital ratios. If there is a significant association between regulatory capital and bank failure for banks falling below the minimum capital ratios, then the ratios are set at an adequate level. For a sample of 560 US bank holding companies in the period 2003-2009, results reveal that the association between the core (Tier 1) capital ratio and bank failure becomes significant if the bank holding company has a Tier 1 capital ratio of less than 6 percent, below which US bank regulators do not regard banks as being well capitalized. During the financial crisis period of 2007-2009, we predict and find an insignificant association when the criterion for banks to be classified as well capitalized is set to its current threshold of 6 percent. The results are significant when we set the criterion to levels of 8 percent or more. The findings of this paper are relevant to regulatory policy discussions and Basel III deliberations relating to the requirement of increasing the minimum Tier 1 capital ratio to cope with hefty losses hitting banks’ capital at times of financial turmoil.
Dr Heba Abou-El-Sood is a lecturer in accounting, finance and banking at Cairo University. Her current research interests include financial accounting; banking; corporate governance. To see Heba’s publications, please access her profile at http://scholar.cu.edu.eg/?q=abouelsood/
