Analyzing Relationships Among Financial Items of Banks’ Balance Sheets

Abstract

The bankruptcy of a big bank can have a chain reaction that causes a huge impact on other sectors, as demonstrated by the Lehman shock. Such an event is called systemic risk, and was the main subject of this study. In this report, the relationships among financial items of banks were analyzed using real data extracted from balance sheets, which were reported by banks listed in the first section of Tokyo Stock Exchange. Following the Cobb-Douglas production function approach, a power-law relationship between equity and debt for each bank become apparent. Furthermore, two variable regression analyses about the power-law relationship were conducted, and it was determined that the parameter estimate can be used as an index measuring macroeconomic condition. No correlation was found between the capital adequacy ratio and the return on equity, which are well-known indicators to characterize bank properties in a quantitative manner. This method makes it easier to understand macroeconomic conditions of banking sector from a comprehensive point of view.