The relationship between capital and earnings in banking
AbstractContrary to conventional wisdom, bank capital ratios are positively related to returns on equity in the 1980s. Higher capital Granger-caused higher earnings and vice versa for U.S. banks, 1983-89. The surprising positive Granger-causation from capital to earnings occurred primarily through lower interest rates paid on uninsured purchased funds. The data support the hypothesis that expected bankruptcy costs for banks increased substantially in the 1980s, raising optimal capital ratios. The causation from capital to earnings became negative in the early 1990s, when aggregate risk, regulation, and earnings changed, but the findings still support the expected bankruptcy costs hypothesis. Copyright 1995 by Ohio State University Press.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 94-2.
Date of creation: 1994
Date of revision:
Other versions of this item:
- Berger, Allen N, 1995. "The Relationship between Capital and Earnings in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 432-56, May.
- Allen Berger, 1994. "The Relationship Between Capital and Earnings in Banking," Center for Financial Institutions Working Papers 94-17, Wharton School Center for Financial Institutions, University of Pennsylvania.
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