The Impact of the Sub-Prime Crisis on the Financial Performance of Investment and Commercial Banks

Abstract

After the latest global financial crisis, Equity Ratio (relating to capital adequacy), Operating Cost Ratio (management capability), Return on Equity (shareholders’ profitability), Return on Assets (bank profitability) and Tobin’s Q (business value) are used in this study to explore the changes in the financial performance of representative investment and commercial banks. Our empirical results reveal that following the sub-prime crisis, management capability, profitability and business value, in both investment and commercial banks alike, all took a turn for the worse; there has also been significant deterioration in the capital adequacy of investment banks. However, the pronounced and negative impacts in both the management capability and profitability of investment banks and commercial banks in the developed markets differ quite markedly from the findings on similar representative banks in the emerging markets. Following the crisis, there were significant declines in the capital adequacy and profitability of investment banks, as well as similar significant declines in the profitability and business value of commercial banks, regardless of the overall size of the bank. These results stand in contrast to the findings reported by both Li (2003) and Aysan and Ceyhan (2008), that when faced with financial crisis, the scale of a bank will be found to have a positive correlation with its financial performance.

Keywords: Sub-Prime Crisis, Financial Performance, Investment Banks, Commercial Banks, Capital Adequacy

JEL Classification: F36, G15, G18