Capital Asset Ratios and Bank Default Probabilities: An International Comparison Based on Accounting Data

This study extends the work of SHELDON (1995) to banks outside of Switzerland. The results confirm the previous finding that capital-to-assets ratios are a poor guide to the soundness of a bank. This finding implies that capital adequacy rules that do not correctly reflect the risks that banks face will not serve their intended purpose of ensuring the soundness and stability of the banks to which they apply.