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

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.