Bank capitalization and bank performance: a comparative analysis using accounting- and market-based measures

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This paper examines performance outcomes of capitalization in the European bank market. Using a European sample with 2,504 firm-year observations for the years 1992–2012, the authors analyze the effect of capitalization as used by the financial regulators on bank risk and bank profitability with alternative accounting- and market-based measures. All accounting-based measures consistently show that higher capitalization reduces bank risk and is associated with increased profitability. Contrary to this, market-based risk measures show higher bank risk implying possibly different risk assessment by capital market participants. Our results are corroborated by an ex post analysis of bank performance in times of crisis. Higher capitalized banks have fared better after the crisis in respect of profitability and risk.

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    • Table 1. Risk measures
    • Table 2. Profitability measures
    • Table 3. Data sample and bank size
    • Table 4. Descriptive statistics
    • Table 5. Correlation matrix of risk and profitability regression variables
    • Table 6a. Regression results for accounting and market-based risk measures for the European bank market from 1992 to 2012
    • Table 6b. Regression results for accounting and market-based risk measures for the European bank market from 1992 to 2012
    • Table 7a. Regression results for accounting and market-based profitability measures for the European bank market from 1992 to 2012
    • Table 7b. Regression results for accounting and market-based profitability measures for the European bank market from 1992 to 2012
    • Table 8. Performance of better capitalized banks during times of crises