History of Credit Crisis as a Mirror: An International Perspective on the Impact of the Sub-Prime Crisis on the Performance of Investment and Commercial Banks

Abstract

For analyzing the aftermath of the latest global financial crisis, five major variables are used in this study to provide separate measures of the performance of 32 representative investment and commercial banks amongst the world’s 1,000 largest banks, in order to explore the changes in their overall performances. These measures are - the equity ratio (relating to capital adequacy), the operating cost ratio (management capability), the return on equity (shareholders’ profitability), the return on assets (bank profitability) and Tobin’s Q (business value). Our empirical results reveal that following the disclosure of the sub-prime crisis, management capability, profitability and business value, in both investment and commercial banks alike, all took a turn for the worse, with clear rises in their risks of management capability and profitability; there has also been significant deterioration in the capital adequacy of investment banks. However, the significant declines 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; that is, investment and commercial banks within the developed nations suffered more direct and pronounced impacts from the credit crisis than those within the emerging markets. As a direct result of the sub-prime 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 stark 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.