Commercial Banking:

The Relationship Between Profitability and Capital Ratios

GGD-86-88BR: Published: Jun 9, 1986. Publicly Released: Jun 9, 1986.

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In response to a congressional request, GAO provided information for all U.S. commercial banks on the relationship between bank capital held at the end of the year and profits earned during the year.

GAO noted that, for the largest bank size categories, the measures of profitability decrease. The relationship between bank capital and profitability ratios could be a reflection of: (1) separate casual relationships between size and the bank capital ratios and between size and profitability; (2) higher profit levels causing capital to increase simply because capital represents the accumulation of past profits; and (3) higher bank capital encouraging profitability, in which case the line of causation would run in the other direction.

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