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On the impact of capital and liquidity ratios on financial stability

Author

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  • Pierre Durand

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

In response to the 2007-2008 global financial crisis, the G20 mandated the Basel Committee to put in place prudential regulations capable of ensuring financial stability: the Basel III agreements. This paper tackles this issue by investigating the impact of capital and liquidity ratios on financial stability for a sample of 1600 banks from 23 countries over the 2005-2016 period. We pay particular attention to the nonlinear character of this potential effect through the estimation of a polynomial model with interaction terms and a panel smooth transition regression. Distinguishing between different types of banks depending on their level of systemicity, we find evidence of a nonlinear effect of prudential ratios on financial stability: a low level of capital improves financial stability, but its effect tends to diminish for higher values. Finally, we show that bank profitability is a significant determinant of financial stability.

Suggested Citation

  • Pierre Durand, 2019. "On the impact of capital and liquidity ratios on financial stability," Working Papers hal-04141893, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141893
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141893
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