Bank Capital Redux: Solvency, Liquidity, and Crisis
What is the relationship between bank capital, the risk of a financial crisis, and its severity? This paper introduces the first comprehensive analysis of the long-run evolution of the capital structure of modern banking using newly constructed data for banks’ balance sheets in 17 countries since 1870. In addition to establishing stylized facts on the changing funding mix of banks, we study the nexus between capital structure and financial instability. We find no association between higher capital and lower risk of banking crisis. However, economies with better capitalized banking systems recover faster from financial crises as credit begins to flow back more readily.
This work is part of a larger project kindly supported by research grants from the Bundesministerium für Bildung und Forschung (BMBF) and the Institute for New Economic Thinking. Schularick acknowledges support from the Deutsche Forschungsgemeinschaft (DFG) under Germany's Excellence Strategy – EXC 2126/1– 39083886, as well as a Fellowship from the Initiative on Global Markets at the University of Chicago. We are indebted to a large number of researchers who helped with data on individual countries. Matthew Baron and Malik Mazbouri kindly shared data with us. We are particularly thankful to João Azevedo and Marco Wysietzki for outstanding research assistance. We benefited from helpful comments by conference and workshop participants attending the 2017 CESifo Area Conference on Macro, Money, and International Finance, the 5th Empirical Macroeconomics Workshop at Ghent University, the Fifth CEPR Economic History Symposium, the 6th Workshop in Financial Economics at the University of Bonn, the ECB, the NBER DAE Program Meeting, the EHA 2017 Annual Meeting, the IDB/Banco Central de Chile 2019 Workshop, and seminar participants at Bank of Finland, Bocconi University, Imperial College, SAFE Frankfurt, and UC Davis. All errors are our own. The views expressed herein are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of New York or San Francisco, the Board of Governors of the Federal Reserve System, or the views of the National Bureau of Economic Research.
Alan M. Taylor
Alan M. Taylor has served as an author, consultant, or speaker for various research organizations, policy making institutions, and financial sector firms.