at the country level or by time changes the standard errors substantially, and conclude that it does not.<sup>6</sup>

# **_Overview of the data_**

Table 1 shows summary statistics for the distribution of stock returns during the sample period for the full sample and for the sample of larger banks. Average quarterly stock returns are also plotted in Figure 1 for each of the countries in the sample. Median quarterly stock returns are positive in the pre-crisis period and, as expected, become negative in the third quarter of 2007, with a median quarterly decline of 2.6 percent in the full sample and 3.5 percent in the sample of larger banks. Returns are also much more dispersed during the crisis than in tranquil times, with the standard deviation more than doubling. The post-Lehman quarters show even more negative stock returns and somewhat higher dispersion.

The main variable of interest is bank capital. As discussed in the introduction, we use a number of alternative definitions of capitals: (1) the risk-adjusted regulatory capital ratio, calculated according to Basel rules. This is calculated as the sum of Tier 1 and Tier 2 capital divided by risk-adjusted assets and off-balance sheet exposures; (2) the Tier 1 regulatory ratio, which is excludes Tier 2 capital from the numerator; (3) the leverage ratio (defined as regulatory capital divided by total assets), the Tier 1 ratio and Tier 2 ratio; and the common equity ratio (defined as shareholder funds). Tier 1 capital comprises shareholder funds and perpetual, non-cumulative preference shares. Tier 2 capital comprises hybrid capital, subordinated debt, loan loss reserves, and valuation reserves. In the debate following the crisis, questions about the ability of the riskadjustment used in the Basel framework to capture bank risk have been raised. Also, the increased reliance by banks (especially large banks) on lower quality capital such as non-tangible equity and Tier 2 capital has been criticized because this type of capital cannot be used to offset losses in times of distress.<sup>7</sup> Table 2 shows summary statistics on bank capitalization in our samples. For the full sample, the median risk-adjusted capital asset ratio was 11.9 percent, comfortably above the minimum Basel requirement of 8 percent, with a standard deviation of 2.8 percent. The median Tier 1 capital was a seemingly healthy 9.7 percent. The median leverage ratio was quite a bit lower, 7.8 percent, and the common equity ratio scaled by assets was just 6.2 percent. Interestingly, larger banks had lower capital than the full sample as measured by the common equity ratio (a median of just 4.1 percent), the leverage ratio (a median of 6.5 percent), or the Tier1 risk-adjusted ratio (8.2 percent). The standard Basel capital ratio, on the other hand, barely differed between the two groups of banks. Thus, larger banks were relying more heavily on lower quality capital and had larger “risk-adjustments” of assets than smaller banks.

> 6 See Petersen (2009) for a study of alternative standard errors in finance datasets.

> 7  See for example, Viñals et al. (2010). Also, the stress tests conducted by the U.S. authorities in May 2009 put much emphasis on the common equity cushion.

6