#09-24
Bank Capital, Survival, and Performance around Financial Crises
Allen N. Berger and Christa H.S. Bouwman, August 2009
Abstract:What does capital do for banks around financial crises? We address this question by examining the effect
of pre-crisis bank capital ratios on banks’ ability to survive financial crises, and on their competitive
positions, profitability, and stock returns during and after such crises. We 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. The evidence suggests that capital helps small banks to
survive banking and market crises, and helps medium and large banks to survive banking crises.
Moreover, the manner in which a bank exits when it does not survive a crisis (e.g., because it is acquired
with or without government assistance) also depends on its pre-crisis capital ratio. Higher capital enables
banks of all size classes to improve their market shares during banking crises and these banks are
generally able to maintain their improved shares afterwards. Around market crises, higher capital enables
only small banks to improve their market shares. Similar, but weaker results are obtained based on
profitability. Higher capital also led to higher abnormal stock returns for banks during one of the banking
crises. During “normal” times between crises, most of the relative benefits of higher capital are
experienced only by small banks. Overall, our results suggest that the importance of bank capital is
elevated during crises, and particularly banking crises.
Keywords: Financial Crises, Survival, Performance, Liquidity Creation, and Banking.
JEL classifications: G28, and G21.
