participants may have viewed the risk-adjustment under Basel as uninformative. Finally, we also find some evidence that Tier 1 capital was seen as the more relevant notion of capital, especially in the sample of larger banks.

Our dependent variable, the stock return, is an imperfect proxy for bank performance during a crisis because it reflects changes in value to stockholders only, and does not reflect changes in the value of debt. In addition, the expectation of government support packages may have blurred the effects of the crisis on bank values. While recognizing these limitations, we believe that changes in equity values are informative as to the differential effects of the crisis on bank value. Also, to explore a possible effect of capital on the value of debt, we test whether bank capitalization explained changes in bank CDS premia during the crisis, and we find no significant effects.

Our paper is related to work by Estrella, Park, and Peristiani (2000), who test how alternative capital ratios fare in predicting U.S. bank failures in the early 1990s, and find that a leverage ratio performs just as well as a risk-adjusted measure of capital. Berger and Bouwman (2009) explore the relationship between bank capital and different aspects of banks performance in crises and tranquil times for U.S. banks. Crises include both banking crises and stock market crashes. Among their tests is a comparison of excess stock returns on a portfolio of well capitalized banks and one of poorly capitalized banks during the recession of the early 1990s and during the recent subprime crisis. According to this study, better capitalized banks did significantly better in the early 1990s, but not in the recent crisis. The study does not explore the potentially different role of alternative concepts of bank capital. Recent work by Beltratti and Stulz (2009) examines how differences in bank corporate governance and country-level regulatory approaches affected bank stock returns in the financial crisis. The main findings are that banks with a board of directors that is less shareholder-oriented and banks that are located in countries with strong capital regulation performed better. Consistent with our results, this study also finds that higher capital is associated with better stock market performance.

The paper is structured as follows: the next section presents the data and the empirical model. Section III contains the main results. Section IV concludes.

# **II.   SAMPLE SELECTION, DATA DESCRIPTION, AND EMPIRICAL MODEL**

# **_Sample selection_**

We construct a sample of banks starting with the all the banks in the Bankscope database that are listed and hence have a stock price. We then exclude banks for which no information is available on capital or other explanatory variables. We also exclude a few banks from countries in the Persian Gulf where the financial crisis followed a different time pattern than the rest of the sample. In addition, since we rely on intra-country variation to identify the relationships of interest, we exclude from the sample countries/dates for which we have less than five banks in the sample. The baseline sample includes a total of 381 banks in 12 economies during the period Q1.2005-Q1.2009. Not all banks enter the sample in every quarter, as the sample is unbalanced.

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