The Causal Relationship between Bank Capital and Profitability

In this article, the relationship between capital structure and return on equity is examined. The relationship between capital structure and return on equity is of considerable importance to all firms and banks. The banking industry is especially sensitive to changes in financial leverage due to their low level of equity capital to total assets. This paper surveys the relationship between capital structure and return on equity. The results show that there is a positive relationship between financial leverage and the return on equity. The analysis is extended to determine the relationship between return on assets and equity capital. The evidence supports the hypothesis that there is a positive relationship between equity capital and return on assets. The result of article showed that there is a positive relationship between profitability and debt ratio.