A Multi-Country Analysis of Bank Capital and Earnings

Abstract

The purpose of this paper is to analyze the relationship between bank capital and earnings. However, because banks and other financial service firms are increasingly operating in a global marketplace, it is important to examine bank relationships beyond the borders of a single country. This paper, therefore, analyzes the relationship between bank capital and earnings employing a sample of 231 banks in ten Pacific basin countries and the United States. More specifically, following the lead of earlier research, the study examines the relationship between the capital-to-asset ratio and return-on-equity. The empirical results indicate that, contrary to the case of U.S. banks during the 1980s, a significant negative relationship exists between these two variables for the sample banks in the eleven countries in 1994. This relationship generally holds when various control variables, including both firm- and country-specific variables, are included.