Profitability, valuation and resilience of global banks - a tight link

John Caparusso, Ulf Lewrick and Nikola Tarashev

No 1144, BIS Working Papers from Bank for International Settlements

Abstract: We derive a tight link between the profitability, valuation and resilience of global systemically important banks (G-SIBs). We measure profitability using return on equity (ROE), valuation with the price-to-book ratio and resilience through the capital headroom above regulatory requirements ("management buffer"). We find that price-to-book ratios increase in analysts' ROE forecasts and in banks' management buffers. We also document that low-valued G-SIBs maintain management buffers by reducing risk-weighted assets and cater to investors by paying out their entire profits. However, the resilience of low-valued G-SIBs could prove precarious as they frequently incur substantial losses that trigger significant negative stock-market reactions.

Keywords: financial stability; price-to-book ratio; banking regulation (search for similar items in EconPapers)
JEL-codes: C25 G21 G28 (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1144

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