The Long-Term Relationship between Capital and Earnings in Banking: Sweden 1870–2001
AbstractContrary to received wisdom, two recent studies report a negative relation-ship between leverage and profitability in banking in the 1980s and early 1990s. This study presents new data on the leverage and profitability of Swedish commercial banks in 1870–2001, and explore the sign of the relation-ship in the long term. In the studied period, the capital-asset ratio decreased by a factor four, while return-on-equity more than doubled. The Leverage Formula postulates a positive linear relation between return-on-equity and the debt-equity ratio. A strong positive linear relationship was found over the period 1871–1980, but not in 1980–2001. Thus, while supporting the re-sults of the previous studies, a long-term “normal” positive relationship be-tween leverage and profitability is also reaffirmed.
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Bibliographic InfoPaper provided by The Ratio Institute in its series Ratio Working Papers with number 63.
Length: 18 pages
Date of creation: 03 Jan 2005
Date of revision:
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Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Phone: 08-441 59 00
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More information through EDIRC
return-on-equity; leverage; bank capital;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
- N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
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