Does the capital structure affect banks’ profitability? Pre- and post financial crisis evidence from significant banks in France

Olivier de Bandt, Boubacar Camara, P. Pessarossi and Martin Rose ()

Debats Economiques et financiers from Banque de France

Abstract: This paper studies the effect of banks’ capitalization on banks’ Return on Equity (ROE). A debate has emerged on the costs for banks of the increase in capital requirements under Basel III. We bring empirical evidence on this issue by analyzing the effect of different capitalization measures on banks’ ROE on a sample of large French banks over the period 1993-2012, controlling for risk-taking as well as a range of variables including the business model. We find that an increase in capital leads to a significant increase in ROE, albeit the economic effect is modest. Furthermore, the method chosen by a bank to increase capitalization (i.e. raising equity) does not alter the result. Over the period, we find some evidence of a negative relationship between the share of credit activities and ROE, which is driven by the 2002-2007 sub-period, characterized by a significant increase in other business line activities. Looking at revenue and cost components, the positive effect of capital on the ROE appears to be driven by an increase in efficiency.

Keywords: ROE; solvency ratios; capital; banking regulation; Basel III. (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-eff and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:12

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