The long-term relationship between capital and earnings in banking

Arbeitspapier

Contrary to received wisdom, some recent studies report a negative relationship 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 explores the sign of the relationship 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 relationship 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 results of the previous studies, a long-term normal positive relationship between leverage and profitability is also reaffirmed.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 611

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Economic History: Financial Markets and Institutions: Europe: Pre-1913 ; Economic History: Financial Markets and Institutions: Europe: 1913-
• Subject: Return-on-equity ; Leverage ; Bank capital ; Bank ; Return on Investment ; Betriebsergebnis ; Kapitalstruktur

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hortlund, Per
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/56201
• Last update: 10.03.2025, 11:43 AM CET