Bank profitability and capital adequacy in the post-crisis context

Bank capital adequacy is the key driver of a resilient banking system that is capable of absorbing shocks. Consequently, Basel III regulation raised the quality and quantity of the regulatory capital base. But are better capitalized banks perceived as less risky by the market? In other words, how do banks' capital bases impact the riskiness of their equity? Does the market also consider leverage, asset quality and profitability? In our work, we aim to address these issues, analysing a sample of large European listed banks (those under ECB supervision) for the 2007- 2013 period. We expect to find that bank equity return riskiness is influenced by capital adequacy and, in turn, by how higher capital ratios have been achieved: through profitability, retained earnings, new share issues or deleveraging (i.e., lower total assets and/or risk weighted assets).