In 2009 all ECB publications feature a motif taken from the €200 banknote. This paper can be downloaded without charge from

credit card interchange feeS

In 2009 all ECB publications feature a motif taken from the €200 banknote. This paper can be downloaded without charge from

publications feature a motif taken from the €200 banknote. This paper can be downloaded without charge from

economieS,

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Abstract not found

Abstract not found

Numerous studies show that banks hold capital ratios exceeding the regulatory minimum. This, however, did not hinder the turmoil of the 2007-2009 crisis and stresses the importance of understanding how banks determine their capital ratios. This paper tests the hypothesis that an exogenous increase in the riskiness of banks ’ asset portfolios, which initially increases their bankruptcy risks, causes banks to adjust their capital ratios. Using exogenous variation introduced by Hurricane Katrina, which exposed banks in the U.S. Gulf Coast area to unexpected losses and increased credit risks in August 2005, we find that impacted banks act precautionary and increase their capital ratios. This shows that banks are also driven by risk concerns and not purely by regulatory requirements. However, when we examine low-capitalized and high-capitalized banks separately, we find that the precautionary behavior only holds for high-capitalized banks.

We present new stylized facts on bank and firm leverage for 2000–2009 using extensive internationally comparable micro level data from several countries. The main result is that there was very little buildup in leverage for the average non-financial firm and commercial bank before the crisis, but the picture was quite different for large commercial banks in the United States and for investment banks worldwide. We document the following patterns: a) there was an increase in leverage ratios of investment banks and financial firms during the early 2000s; b) there was no visible increase for commercial banks and non-financial firms; c) off balance-sheet items constitute a big fraction of assets, especially for large commercial banks in the United States; d) the leverage ratio is procyclical for investment banks and for large commercial banks in the United States; e) banks in emerging markets with tighter bank regulation and stronger investor protection experienced significantly less deleveraging during the crisis. These results show that excessive risk taking before the crisis was not easily detectable because the risk involved the quality rather than the amount of assets.