Analyzing Impact of a Crisis on Bank Financial Ratios

15 Pages Posted: 7 Jan 2021

See all articles by Osman Nal

Osman Nal

William & Mary

Andrew Cai

Clements High School

Date Written: November 11, 2020

Abstract

In this study we provide a practical framework and methodology for analyzing the effects of banking shocks (economic or financial in nature) on bank fundamentals, that avoids the use of complicated econometrics methods. For this, we focus our attention to the effects of the 2007-2008 global financial crisis on the four largest US banks and examine the variation of trends in the select financial ratios for those institutions using quarterly regulatory data running from 2002-Q4 to 2020-Q2. We start by plotting time series charts of those financial ratios for each bank and compare the before-crisis, transition and after-crisis periods. For this, we simply fit trend lines with three parameters of shift, slope, and volatility to the banking data. The shift parameter describes the level change of the variable when before- and after-crisis periods are compared. The slope parameter pronounces the difference in steepness of the trend lines, while the volatility parameter is associated with all three periods and describe the variation in the data during each period. Our results indicate that capital ratios, an important regulatory financial ratio, are higher across the board in the after-crisis period compared to before-crisis period, suggesting a positive shift. We don’t see significant changes in slope parameter for the capital ratio series leading us to suggest the use of dummy variable regression model where slope is treated as a fixed constant. We further show that pre-crisis and transition periods are characterized by higher volatilities that ultimately subside in the after-crisis period. Lastly, we conclude by suggesting that financial practitioners use the shift, slope and volatility parameters in understanding trends in financial time series data since it is easy to implement and interpret the results compared to more sophisticated econometric models.

Keywords: financial crisis, banking shocks, financial ratios, trends

JEL Classification: G01, G21

Suggested Citation

Nal, Osman and Cai, Andrew, Analyzing Impact of a Crisis on Bank Financial Ratios (November 11, 2020). Available at SSRN: https://ssrn.com/abstract=3730205 or http://dx.doi.org/10.2139/ssrn.3730205

Osman Nal (Contact Author)

William & Mary ( email )

P.O. Box 8795
Williamsburg, VA 23185
United States

HOME PAGE: http://https://mason.wm.edu/faculty/directory/full-time-faculty/nal_o.php

Andrew Cai

Clements High School

United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
48
Abstract Views
241
PlumX Metrics