EVALUATION OF BANKING PERFORMANCE BASED ON THE RATE OF RETURN ON EQUITY AND THE TOTAL CAPITAL RATIO

Abstract

In the financial-banking field, rational behavior is explained by maximizing return at an assumed level of risk or vice versa, maximizing risk at an expected return in order to maximize the value of the economic entity. The performance of a credit institution is no longer defined by the traditional profit, but by the profit that shows a real increase in the value of the economic entity, of the shareholders' equity. Peter Drucker1 says that "Management gives up its traditional master - profit, it now engages, more and more meaningfully, in the service of value". We agree with this opinion, demonstrating that a credit institution can obtain this profit by properly managing their banking assets and liabilities from a temporal, value and financial standpoint, as well as by keeping track of the bank's liquidity and solvency at the microeconomic level. Performance and risk are two essential components of the management of credit institutions. Starting from the fact that in recent years the economic crises have generated the emergence of new risks and vulnerabilities, we utilized the regression method to better analyze the financial performance based on banking performance ratios, and thereby revealed the correlations between return on equity and risk, as well as the form and strength of the correlation.

Keywords

• banking performance
• return on equity
• capital risk
• regression equation
• total capital ratio