HOW WELL CAPITALIZED ARE WELL-CAPITALIZED BANKS

The wave of bank and savings and loan failures in the 1980s and early 1990s, and the resulting losses to deposit insurance funds, served to highlight the need for banks to hold sufficient capital to survive dif ficult times. In addition, many argued that deposit insurance reduces the market discipline that depositors might otherwise provide. Consequ ently, recent bank regulatory initiatives increasingly have emphasized the role of bank capital as a cushion to allow banks to absorb advers e shocks without experiencing insolvency. While regulations are being designed to reward banks that are deemed to be well. capitalized and r estrict those that are not, no dear consensus has been reached in the academic literature on just-how much capital is necessary. This articl e examines whether institutions satisfying the ''well-capitalized'' cr iteria before and during the recent banking crisis in New England had sufficient capital to weather the storm. The authors find that many of the institutions that either failed or required substantial superviso ry intervention were well capitalized prior to the emergence of bankin g problems in New England. Problems of the magnitude recently experien ced in New England would require greater capital cushions than the min imum ''well-capitalized'' prompt corrective action threshold, if wides pread bank insolvencies were to be avoided.