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

• Authors: Srđan Marinković
• Languages of publication: EN

Abstracts

EN

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.

Keywords

EN

Profitability; solvency; bank model; net interest margin

• Publisher: Sciendo
• Journal: South East European Journal of Economics and Business
• Year: 2009
• Volume: 4
• Issue: 2
• Pages: 81-88

Dates

published

2009-11-01

online

2011-06-13

Contributors

author

Srđan Marinković

• Faculty of Economics, University of Niš

References

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Identifiers

DOI

10.2478/v10033-009-0016-1