Looking under the Hood

• Author: José M. Cartas and Ricardo Cervantes
• Position: Prepared by and of the IMF's Stattics Department.

Data Spotlight

SINCE the start of the global financial crisis in 2008, the health of the banking sector, as measured by capital adequacy ratios (CARs), has rebounded in all regions.

From 2003 to 2010—even during the crisis—all regions show CARs comfortably above the minimum 8 percent set by the Basel Accords, which established international banking rules on how much capital banks need to set aside. Before the crisis, capital ratios remained stable in most regions—in advanced economies, developing Asia, Latin America, and sub-Saharan Africa—and showed a declining trend (from relatively high levels) in central Europe, the Commonwealth of Independent States, and the Middle East. After the financial crisis, CARs increased steadily in all regions except the Middle East and central Europe.

How was this achieved? In most advanced economies, while there was some increase in equity, banks improved CARs by limiting credit to their customers and shifting the composition of their portfolios to low-risk assets such as government securities. Other regions show an increase in both the capital base and banks' exposure.

Looking at national averages, the deterioration of banking system solvency is evident for countries hit particularly hard by the crisis, with averages for Greece and Portugal barely above the minimum 8 percent in 2008. The CAR for Iceland—an early victim of the financial crisis—hovered slightly above 12 percent until 2007, when the financial crisis wiped out more than 80 percent of that country's banking system assets. After the restructuring of Iceland's financial system, the ratio increased to more than 18 percent in 2010. CARs for the United States, the United Kingdom, and Japan show a similar pattern to that of the advanced country group—that is, stable values until 2008 followed by a steady...