Moritz Schularick from Bonn likes
to go for big questions – so in a recent paper with Oscar Jorda, Bjoern Richter and Alan Taylor, he asks whether bank capitalization can predict systemic fragility? Using data
for almost 150 years, the answer is: NO. Banks’ solvency has no value as a crisis predictor; liquidity indicators, such as the loan-to-deposit ratio and the share of non-deposit funding, have some predictive power, but the most robust and clearest crisis
predictor is loan growth. One consolation prize for the higher-capital-buffer-lobby: recoveries from financial crisis recessions are much quicker with higher bank capital (consistent with the recent experiences in U.S., Japan and Eurozone, I would add).