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An Empirical Study of Bank Capital and Risk Taking: Evidence from the Recent Financial Crisis

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Author: Liu, Zhen
In this paper, we examine the relationship between bank capital and risk taking in the United States. We use bank capital data in 2007, and bank risk-taking data in 2008. We measure risk taking in three ways: allowance for loan and lease losses, net charge-offs, and provision for loan and lease losses. We measure capital also in three ways: tier 1 leverage ratio, tier 1 risk-based capital ratio, and total risk-based capital ratio. Overall, our results suggest that banks with higher capital ratios take more risk.
FRM Project-Simon Fraser University
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