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Capital ratios and banking crises in the European Union

Author

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  • Raphaël Cardot-Martin
  • Fabien Labondance
  • Catherine Refait-Alexandre

Abstract

We assess if capital ratios reduced the occurrence of banking crises in the European Union from 1998 to 2017. We use a Probit model and estimate the effect of two measures: the bank capital to total assets ratio and the bank regulatory capital to Risk Weighted Assets (RWA). We found that both measures affect negatively the probability of crisis. This result is robust to the exclusion of outliers, to the inclusion of various control variables for banking, financial and macroeconomic risks. Finally, we show that while the bank regulatory capital to RWA has always a negative effect on the probability of crisis, the bank capital to total assets ratio is only significant above a threshold, estimated between 10 ?% and 12 ?%.

Suggested Citation

  • Raphaël Cardot-Martin & Fabien Labondance & Catherine Refait-Alexandre, 2022. "Capital ratios and banking crises in the European Union," International Economics, CEPII research center, issue 172, pages 389-402.
    • Handle: RePEc:cii:cepiie:2022-q3-172-29
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    More about this item

    Keywords

    Banking regulation; Leverage ratio; Risk-weighted capital requirement; Banking crisis;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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