Economic Policy Review
Capital Ratios as Predictors of Bank Failure
July 2000 Volume 6, Number 2
JEL classification: G21, G28

Authors: Arturo Estrella, Sangkyun Park, and Stavros Peristiani

The current review of the 1988 Basel Capital Accord has put the spotlight on the ratios used to assess banks’ capital adequacy. This article examines the effectiveness of three capital ratios—the first based on leverage, the second on gross revenues, and the third on risk-weighted assets—in forecasting bank failure over different time frames. Using 1988-93 data on U.S. banks, the authors find that the simple leverage and gross revenue ratios perform as well as the more complex risk-weighted ratio over one- or two-year horizons. Although the risk-weighted measures prove more accurate in predicting bank failure over longer horizons, the simple ratios are less costly to implement and could function as useful supplementary indicators of capital adequacy.

PDF full articlePDF20 pages / 145 kb
Press release
tools
Related New York Fed Content
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close