Do profitable banks with a solid capital base have a higher ratio of capital buffer? : Reviewing the impact of regulation, the previous financial crisis and banks own incentives of having excess capital.

The financial crisis starting in mid-2007 is still affecting us, and with increased regulation banks and institutions are supposed to get more solvent and the industry to become more stable. The Basel Committee is working towards more unified regulation across countries, but the question is how the increased regulation is affecting banks financials. Do profitable banks with a solid capital base have a higher ratio of capital buffer? Looking at banks in 16 OECD countries during the period 1993-2009, with country-level panel-data displayed in two simultaneous equation estimations illustrating how profit and capital buffer has changed during these years, and the relation between them. To get an understanding of how the crisis affected these variables the regressions are also done for a pre-crisis period of 1993-2006. Internal funding variables and other economic control variables are explanatory variables and results show the internal funding variables have a large effect on profit and for capital buffer profit have the largest impact. Results imply that profitable banks with a solid capital base do have a higher ratio of capital buffer. The results coincide with the franchise value theory which is applied in the paper.