An Analysis of Capital Measures and Relative Bank Profitability
Southern Business Review, Vol. 12, No. 1, pp. 18-31, Spring 1986
15 Pages Posted: 8 Jun 2015 Last revised: 29 Dec 2015
Date Written: August 16, 2015
Abstract
This study reports the results of a longitudinal analysis of the nature of the association between selected bank capital (book value) measures and relative profitability, with emphasis on high-performance banks. Capital management is a major component variable in bank financial management. Interest in bank capital has been stimulated recently b deregulation and the rash of bank failures. Conceptually, every decision should be considered for its impact on the maximization of shareholder wealth. However, in a world of uncertainty, regulation, and limited action/reaction time and resources, it is not possible to follow the conceptually correct approach for the multitude of decisions bankers face. One practical approach to the complex, interactive nature of bank decisions is to disaggregate them into key variables for financial management: (1) "spread management" (net interest margin), (2) overhead expense control, (3) liquidity management, and (4) capital management. Both liquidity and capital management are related to the risk component of bank financial management, while the other two variables are related to the income competent.
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