A better way to measure online risk
One capital ratio tops others in foreshadowing play Risk online
distress—and it’s not the one that’s traditionally been regulated.
APRIL 2010 • Kevin S. Buehler, Christopher J. Mazingo, and Hamid H. Samandari
Source: Corporate Finance Practice
In This Article
Exhibit 1: The TCE/RWA capital play Risk online
ratio outperformed every other metric in predicting how many banks were likely to become distressed.
Exhibit 2: Higher capital ratios leave fewer banks at risk of distress but also come with a higher price tag—and play Risk online
lower returns for banks.
In response to the global banking crisis, regulators and policy makers worldwide have united behind efforts to increase financial institutions’ minimum capital requirements play Risk online
and to limit leverage, hoping to reduce the likelihood of future bank distress.1 As of this writing, the debate over proper capital requirements continues, with major implications play Risk online
for the industry and the economy—yet there have been few specifics on which ratios should be targeted or at what levels.
To shed some light on the discussions, play Risk online
we analyzed the global banking crisis of 2007 through 20092 to identify relationships that different types of capital and capital ratios have to bank distress.3 Our analysis is observational, based on historical data, and not a real-world play Risk online
experiment, which would have required randomly selected financial institutions to hold different capital levels to gauge their effects. As a result, the findings do not definitively establish how institutions might perform in the future if minimum capital ratios were changed, but we believe that the evidence we provide is a valuable input for current policy discussions.