<abstract xml:lang="en" xmlns="http://www.w3.org/1999/xhtml"><p>This paper develops a simple deterministic model to analyze how the profitability of bank operations infuences the solvency of a banking firm. The results imply that the solvency ratio is directly related to the net interest margin (the "bread and butter" of bank profitability) and inversely related to the liquidity ratio. This model has several implications on the design of banking regulations: i) profitability has to be treated as "marginal" solvency, ii) a profitable bank can operate sustainably even with a low level of equity capital; iii) the supervisory framework has to be able to recognize any measure of earnings level, its trends, stability and quality; and finally iv) the frequency of audit trials has to be as high as possible.</p></abstract>

This paper develops a simple deterministic model to analyze how the profitability of bank operations infuences the solvency of a banking firm. The results imply that the solvency ratio is directly related to the net interest margin (the "bread and butter" of bank profitability) and inversely related to the liquidity ratio. This model has several implications on the design of banking regulations: i) profitability has to be treated as "marginal" solvency, ii) a profitable bank can operate sustainably even with a low level of equity capital; iii) the supervisory framework has to be able to recognize any measure of earnings level, its trends, stability and quality; and finally iv) the frequency of audit trials has to be as high as possible.

The Interaction of Profitability with Solvency: A Simple Model of a Bank

South East European Journal of Economics and Business

{"article-title":"The Interaction of Profitability with Solvency: A Simple Model of a Bank"}

This paper develops a simple deterministic model to analyze how the profitability of bank operations infuences the solvency of a banking firm. The results...

The Interaction of Profitability with Solvency: A Simple Model of a Bank

Data publikacji: 13 cze 2011

Zakres stron: 81 - 88

DOI: https://doi.org/10.2478/v10033-009-0016-1

Słowa kluczowe
Profitability, solvency, bank model, net interest margin

This content is open access.

The Interaction of Profitability with Solvency: A Simple Model of a Bank

Data publikacji: 13 cze 2011

Zakres stron: 81 - 88

DOI: https://doi.org/10.2478/v10033-009-0016-1

Słowa kluczoweProfitability, solvency, bank model, net interest margin

This content is open access.

Słowa kluczowe
Profitability, solvency, bank model, net interest margin