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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: before the crisis, differences in capital did not affect subsequent stock returns; during the crisis, higher capital resulted in better stock performance, most markedly for larger banks and less well-capitalized banks the relationship between stock returns and capital is stronger when capital is measured by the leverage ratio rather than the risk-adjusted capital ratio.
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