EBA欧洲银行-A1-ODe-Bandt-Does-the-capital-structure-affect-banks-profitability_20页_417kb

Summary of "Does the capital structure affect banks' profitability? Pre and post-financial crisis evidence from significant banks in France"

Core Content

This study investigates the relationship between capital structure and bank profitability, focusing on French banks from 1993 to 2012. It addresses the debate on whether higher capital requirements negatively or positively affect bank performance, and provides empirical evidence to contribute to this ongoing discussion.

Main Hypotheses

The paper tests three main hypotheses based on theoretical literature:

1. Hyp. 1: The capital structure has no impact on bank profitability (Modigliani & Miller, 1958)

   • Suggests that capital structure is irrelevant to profitability due to the separation of investment and financing decisions.

2. Hyp. 2: Capitalisation negatively impacts bank profitability

   • Argues that higher capital reduces the ability of banks to take risks, potentially leading to lower returns.

3. Hyp. 3: Capitalisation positively impacts bank profitability

   • Suggests that higher capital improves monitoring, reduces risk, and enhances bank ratings, thereby increasing profitability.

Key Findings

• The study finds a positive effect of capitalization on ROE for French banks, even after controlling for risk-taking and business model.
• Banks that increase capital tend to perform better in terms of ROE in the following two years.
• The economic effect of capital is identified by controlling for the "pure" accounting effect, which is separate from the actual performance impact.
• Capital increases revenue efficiency more than cost efficiency, suggesting that capital has a stronger positive impact on revenue generation.

Methodology

• Data: 17 significant French banks over the period 1993–2012, selected based on their size (TA > 30Bn €) and relevance to macro prudential regulation.

• Model: A fixed effect (FE) model at the bank and year level, controlling for heteroskedasticity and excluding bank size due to multicollinearity.

• Capital Measures: Five different capital ratio measures are considered:

  • Capital ratio: Equity / Total assets
  • Tier1 / Tangible assets
  • Tier1 / Total assets with off-balance sheet (OBS) exposures
  • Tier1 regulatory ratio: Tier1 / Risk-weighted assets (Basel I)
  • Total regulatory ratio: Tier1 + Tier2 / Risk-weighted assets (Basel I)

• Endogeneity: Addressed by using lagged capital measures (1y and 2y) and testing for Granger causality, which shows a unidirectional relationship from capital to ROE.

Robustness Checks

• The study confirms the positive relationship between capital and profitability across various specifications.
• It accounts for:
  • Bank size (excluded in the main model due to multicollinearity)
  • Market power (measured by deposits and assets)
  • Non-linear effects of capital, diversification, and loan share
  • Exclusion of financial crisis period
  • Use of Basel II RWA after 2008
  • Alternative performance measures such as ROA and RORAC

Further Investigation: Capitalisation and Efficiency

• The paper explores the efficiency channel through which capital affects profitability, following Berger (1995).
• It constructs an efficiency measure as the ratio of net operating income to administrative expenses.
• Key results:
  • Well capitalized banks are more efficient.
  • An increase in capital leads to faster revenue growth than cost growth.
  • Capitalisation is associated with higher efficiency.

Conclusion

• The study concludes that capitalisation positively affects bank profitability, particularly through the revenue efficiency channel.
• The results are robust across different models and control variables.
• It also suggests the need for further research on regulatory constraints and governance changes (e.g., mergers, privatizations) in relation to capital and performance.

Contributions

• Provides empirical evidence from a major European banking system, contributing to the theoretical debate on capital structure and profitability.
• Highlights the importance of capital in improving bank efficiency and performance, offering a nuanced view of the trade-offs between capital and profitability.