How Does Capital Affect Bank Performance During Financial Crises?
How does capital affect bank performance during financial crises? The authors address this question by examining the effect of pre-crisis bank capital ratios on banks' ability to survive financial crises, and their market shares, and profitability during such crises. They distinguish between two banking crises and three market crises that occurred in the U.S. over the past quarter century, and examine small, medium, and large banks separately. They have two main results. First, capital helps banks of all sizes during banking crises. Second, higher capital improves the performance of small banks during market crises.