Public Capital, the Deposit Insurance and the Risk-Shifting Incentive

Evidence from the Regulatory Responses to the Financial Crisis in Japan

Brahim Guizani, Tunis Business SchoolWako Watanabe, Keio University

March 29, 2013SESAMI Seminar, Osaka, Kobe University

22

Main Research Objectives Three policy measures employed in response to the

banking (financial) crisis are to be assessed in terms of their impacts on risk-shifting of banks whose deposits are insured by the deposit insurance.

Three policy measures are: The DI coverage limit lifted (the blanket insurance) The Prompt Corrective Action framework introduced

(PCA) Public recapitalization of banks

Empirical Questions Answered

Does the DI with “unfair” pricing system, particularly the blanket insurance, lead to insured banks’ risk-shifting?

If insured banks do engage in risk-shifting, is there any policy to help mitigate it?

PCA? Public recapitalization?

44

Major Findings

The blanket insurance did not accelerate banks’ risk- shifting at least in aggregate.

The PCA weakened fully insured banks’ incentives to shift their risks to the deposit insurer.

Public capital infusions of March, 1999, under which the amounts to be injected reflected recipient banks’ needs for capital effectively disciplined them to moderate risk-shifting. Will discuss why.

Outline of the Presentation Introduction Crisis policies Fair and “unfair” pricing of DI Literature review How to estimate the “fair premium”? Empirics Empirical methodology (hypotheses) Data Results Robustness test results

66

Introduction

77

Policy Reactions to the Japanese Crisis 1The Blanket Deposit Insurance

The pre crisis period DI coverage limit (cap) for principals per depositor per institution = 10 million yen

The cap abandoned in June, 1996. The cap reinstated in April, 2002 for term-deposits,

ending the blanket insurance. The DI was transformed from the limited insurance to

the unlimited insurance (no coverage limit).

88

Policy Reactions to the Japanese Crisis 2The Prompt Corrective Action (PCA)

The PCA took in effect in April, 1998, but domestic banks granted one year moratorium.

The government is authorized to intervene when the risk based capital adequacy falls short of the regulatory minimum (8% for international banks & 4% for domestic banks).

The action becomes progressively tougher as the shortfall to the regulatory minimum widens.

Capital requirements are enforced under the PCA. The government intervention is a penalty imposed on a

bank that violates capital requirements

99

Policy Reactions to the Japanese Crisis 3Public Capital Infusions, March, 1998

The public capital infusion program of Mar. 1998 (The 1998 program)

Total 1.8 trillion yen 22 banks including 19 major banks (city, long-term

credit and trust banks) Among major banks, all but one small trust bank were recipients.

All city banks and IBJ received almost an equal amount of public capital regardless of their need for capital.

1010

Policy Reactions to the Japanese Crisis 3Public Capital Infusions, March, 1999

The public capital infusion program of March 1999 (The 1999 program)

Total 7.5 trillion yen 15 banks including 14 major banks. The amount infused varies from city bank to city

bank, presumably reflecting each bank’s capital need (adequacy).

Bank of Tokyo Mitsubishi, supposed to be the healthiest, did not receive public capital.

1998 and 1999 Programs in Comparison Infusions into City Banks

(billion yen) 1998 1999 Daiichi-Kangyo 99 900Fuji 100 1000IBJ 100 600Sakura 100 800Sumitomo 100 501Tokyo Mitsubishi 100 0Sanwa 100 700Tokai 100 600Asahi 100 500Daiwa 100 408

Policy Responses to Crises in Comparison

Japanese Crisis Global Crisis

Expanded DepositProtection Blanket DI Enhanced DI

ProtectionTougher CapitalRequirements PCA Basel III

Capital Infusions 1998 and 1999programs TARP, etc

20-13

What Is DI?

Publicly run insurance to pay off to failed banks to cover losses incurred by their “insured” depositors

Deposit InsuranceBanks

Premium

Failed banks

GovernmentEquity

Insurance Payoff

Deposit Insurance in Japan

Deposit Insurance Corporation of Japan (DICJ) Established in July, 1971.

Modeled after FDIC of the US. The cap pertaining to principals raised twice to 10

million yen in July, 1986. The DI is compulsory to depository institutions. As of now, principals of up to 10 million yen in total

and accruing interests are covered by DI.

Why Need to Enhance DI during the Crisis?

Panicking depositors hearing a bad news about banks run on their banks to withdraw their deposits even though their banks are solvent.

People would not run on banks if their deposits were protected by publicly run DI (Diamond & Dibvig, 1983).

After the creation of FDIC, bank runs became rare in the U.S.

1616

“Fair”and “Unfair” Pricing in DI? The value of DI = the value of payoff of DI = “fair premium” The insurance is paid off to a bank’s depositors at the time of its

failure so that the value of DI increases with a bank’s default risk. The actual premium per unit of deposits taken is fixed (flat rate

premium). The “net” value (= the value of payoff - premium) of DI also

increases with a bank’s default risk.

Bank’s default risk

Premium per unit of deposits

The value of DI to a bank = “fair premium”

Net value of DI to a bank

1717

“Unfair” Pricing of DI and Risk-Shifting? The fair premium is called so because the benefit and the cost to

be insured are the same. The actual pricing of DI is “unfair”, because the net value of DI

varies depending on a bank’s default risk. A bank has an incentive to increase risk-taking because a

greater risk-taking increases the net value of DI.

Bank’s default risk

Premium per unit of deposit

Net value of DI to a bank

“Unfair” Pricing of DI: Facts In Japan, the DI pricing is perfectly flat. Raised from 12bp to 84bp in Apr. 1996 right before the

start of the blanket DI. In other countries, the risk-DI premium profile “flatter”

(than the fair rate) but not fixed. The FDIC determined the rate based on capital

adequacy and CAMEL (regulatory) rating. The FDIC’s risk based premium system was de-facto

flat pricing.

1919

Literature on Tougher Regulations and Their Effects of Mitigating Risk-Shifting

Regiona Era Type of togherregulations

Moral hazardmitigating effect

Grossman (AER, 1992) Milwaukee, Chicago 1930s Regulatory toughness YES

Duan et al. (JBF, 1992) U.S. 1980s Introduction of capitaladequacy requirements YES

Hovakimian & Kane (JF, 2000) U.S. 1980 - 1990sIntroduction of

promptive correctiveaction

YES

Hovakimina et al. (JFSR, 2003) 33 countries 1990s

Tougher designs of DIsuch as insurance cap

and risk sensitivepremium

YES

2020

Literature on Public Capital Infusions and Banking Behavior

Region Influences on Banking Behavior

Montgomery & Shimizutani (JWE, 2009) Japanese capital infusions The 1999 program increased loans but the1999 program did not.

Hoshi & Kashyap (JFE, 2010) Japanese capital infusions The 1999 program was sufficient but the1999 program was not.

Gianneti & Simonov (2010) Japanese capital infusions The 1999 program increased loans but the1999 program did not.

Allen et al. (forthcoming JIBS) Japanese capital infusions The 1999 program increased loans but the1999 program decreased loans.

Bayazitova & Shivdasani (2010) U.S. TARP TARP recipients increased loans.Duchin & Sosyura (2010) U.S. TARP TARP recipients made riskier lending.

Black & Hazelwood (2010) U.S. TARP TARP capital made large banks more riskybut small banks less risky.

Berger et al. (2010) German capital infusions Capital injections by the Banker'sAssociation reduced NPLs.

2121

Fair Pricing of DI

What is “Fair” pricing?

How much would a bank have to pay to a hypothetically “private” insurer to cover losses incurred by its depositors?

The value of DI = the value of payoff of DI = “fair premium”

The value of DI to a bank = Expected payoff + Risk premium

The value of the DI to a bank is estimated implied from the bank’s stock prices.

2323

The Payoff of the Fair DI Premium as a Put Option (Ronn & Verma, 1986)

21

11,0max

BBBVBFV T

B1: Insured deposits B2: Uninsured bank debts depositsFV(B1): Future value of insured VT: The market value of a bank’s total assets

The insurance is paid out to a bank when the value of the bank’s assets entitled to insured depositors is found to be less than the value of insured deposits at the regulator’s inspection (every T years).

The put option formula with FV(B1) as a strike price.

How to Obtain the Fair Premium?

Evaluate the put using the B-S option formula and divide it by B1 to obtain the insurance premium per unit of deposits (IPP)

21

2

1

21ln

1

BBBT

TVB

y

yNBVTyN

BIPIPP

V

Vn

nV

V and V unobservable so need to be estimated

Data

Nikkei NEEDS, Financial Statements of All Banks/Mutual Banks, disclosure reports to fill in missing values

All 123 listed Japanese banks (Tokyo, Osaka, Nagoya and Fukuoka)

Used unconsolidated statements of sample banks. The semiannual sample from 2nd, FY 1986 to 2nd, FY

2007 The DI cap was raised to 10 million yen in Jun., 1986.

Some Data Issues Following Hovakimian et al. (2003)Bank-date observations with at least one of IPP, B/V and Vbeing within top or bottom 1 percentile were dropped.Banks remain in the sample only when they are observed for at least three consecutive years. Minor Caveat about the DataTwo long-term credit banks had been temporarily nationalized but were relisted after being re-privatized so they are treated as different banks before and after being nationalized.

Descriptive Statistics N mean median standard

deviation min max

Total liabilities, B (100 million yen) 4018 60,461 23,328 113,542 1,942 988,861

Market value of equity, E (100 million yen) 4018 5,487 1,410 12,958 85 113,178

Annualized standard deviation of rate of return on equity, E (%)

4018 32.4 30.3 13.2 5.0 104.5

Annualized standard deviation of rate of return on assets, V (%)

4018 2.17 1.73 1.45 0.2 11.24

Market value of assets, V (100 million yen) 4018 64,396 24,068 122,024 1,969 1,005,734

Leverage ratio, B/V (100 million yen) 4018 96.3 97.0 3.2 82.5 101.7

IPP 4018 0.1542 0.0453 0.2773 0.0000 2.9029

The descriptive stats comparable to those of US banks reported in Hovakimian and Kane (2000) who employed the same methodology.

Descriptive Statistics

N mean median standard deviation min max

Public capital infused in March 1998 as a share of the market value of total assets, PUBINJ98 (%)

3909 0.0227 0 0.1572 0 2.5419

Public capital infused in March 1999 as a share of the market value of total assets, PUBINJ99 (%)

3909 0.0404 0 0.2952 0 4.5378

Public capital infused at time any other than in March 1998 and in March 1999 as a share of the market value of total assets, PUBINJOTHER (%)

3909 0.0571 0 0.3611 0 3.5932

Aggregate Trends of IPP and Leverage

Source: Authors’ calculations, Deposit Insurance Corporation of Japan

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1986

P219

87P2

1988

P219

89P2

1990

P219

91P2

1992

P219

93P2

1994

P219

95P2

1996

P219

97P2

1998

P219

99P2

0.8

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.96

0.98

1

IPP (left axis) DICJ premium (left axis) B/V (right axis)

(%)

Trends of IPP and CDS Reference Price, Mitsui Sumitomo Bank (Sumitomo Mitsui FG)

Source: Authors’ calculations, Tokyo Financial Exchange

3131

Empirics

The Risk-Shifting Hypothesis

The basic idea: A bank is engaged in risk-shifting if the bank is increasing risk-taking so as to increase the value of DI.

By definition (construction), the unit value of DI, IPP, is an increasing function of a bank’s asset risk (volatility) and its leverage.

IPP does not necessarily increase in a bank’s asset volatility when the leverage and the asset volatility are negatively correlated. Will show why.

The following discussion follows Hovakimian and Kane (2000)

The Risk-Shifting Hypothesis

The risk-shifting incentive exists if 1>0 If 1<0, the degree of risk-shifting incentive (1) is

weakened. If 1 is sufficiently negative so as to dominate the

positive first term, 1 could become negative.

V

VV

dVBd

VBIPPIPP

ddIPP

1

11 )/(>0

>0

0,0

,

VBIPPIPP

VBIPPIPP

V

V

The Risk-Shifting Hypothesis

Why 1<0 ? The regulator requests a bank with increasing asset risk

to delever. The Basel minimum capital required under the Basel

framework is proportional to risk assets. The PCA enforces the Basel requirements.

V

VV

dVBd

VBIPPIPP

ddIPP

1

11 )/(>0 >0

VBIPPIPP V ,

The Risk-Shifting Hypothesis

1 may change over different regulatory regimes, so may 1 (say 1 is more negative when PCA is in effect than when it is not.).

What impacts different regulatory regimes have on coefficients, 1 and 1?

V

VV

dVBd

VBIPPIPP

ddIPP

1

11 )/(>0 >0

VBIPPIPP V ,

Regulatory Regimes in Consideration

International (domestic) banks are (not) allowed to operate overseas branches

DI PCA International Domestic

Phase I Limited No - May, 1996

Phase II Blanket No - Mar., 1998 - Mar., 1999

Phase III Blanket Yes - Mar., 2002

Phase IV Limited Yes Apr., 2002 -

Regulatory Regimes: Phases 1 though 4

37

July, 1971 June, 1986 June, 1996 April, 1998 April, 1999 April, 2002

International banks

Domestic banks

Start of PCA fordomestic banks

10 mil. DI caprestoredDI begins

DI capraised to 10

mil. yen

Start ofblanket DI

Start of PCA forinternational banks

Phase I Phase II

Phase IIPhase I

Phase III

Phase III

Phase IV

Phase IV

The 1998 program(March, 1998)

The 1999 program(March, 1999)

3838

The Risk-Shifting Hypothesis

Cross products for public capital variables are added to models of Hovakimian and Kane (2000).

Dis: dummy variables that represent regulatory regimes (phases I through IV)

PUBINJis: public capital of type i / V (the market value of a bank’s assets)

We are interested in a). how coefficients of v vary over different regimes and b) how banks’ responsiveness to V depends on public capital injections of different types (coefficients of PUBINJis).

Vi OTHERi

iiii

VOTHERi

iiii

i

PUBINJDIPP

PUBINJDVB

4

2 ,99,9810

,99,98

4

210

Regulatory regime leverage IPP

(risk-shifting incentive)

Limited DI -0.1173 0.2577 *** (0.1190) (0.0618)

Blanket DI only 0.0621 0.3177 *** (0.0803) (0.0390)

Blanket DI + PCA -0.5221 *** 0.1518 *** (0.1398) (0.0434)

Limited DI + PCA -0.4601 ** 0.2037 ** (0.2142) (0.0891)

A change from “Blanket DI only” to “Blanket DI + PCA”

-0.5842 *** -0.1659 *** (0.1585) (0.0606)

3939

Main Results: The Effects of the Blanket DI and the PCA on Banks’ Risk-Shifting

Sums of the coefficient of V and the cross product are shown.

Main Results, Contd.: The Effects of the Public Capital on Banks’ Risk-Shifting

leverage IPP

(risk-shifting incentive)

9.0443 4.0751 PUBINJ98 (9.0071) (3.6906) -26.1113 *** -9.0388 *** PUBINJ99 (8.6645) (2.4186) -8.4878 -5.3824 PUBINJOTHER (8.4325) (3.0902)

Coefficients of a cross product with V are shown.

Main Regression Results The risk-shifting exists consistently under any

regulatory regime, but there is no statistically significant difference between the pre blanket era and the post blanket-pre PCA era

Under the PCA, asset risk and leverage are negatively correlated. The extent of risk-shifting was reduced after the PCA became effective.

The 1999 public capital infusion program induced the negative asset risk – leverage relationship, and weakened banks’ risk-shifting.

Neither the 1998 program or any other program had any effect on banks’ risk-shifting incentives.

Distinctive Designs of 1998 and 1999 Programs

The amount of public capital injected was independent of a bank’s financial health under the 1998 program, whereas the amount varied from bank to bank under the 1999 program.

If the public recapitalization program is designed such that the greater a(n) increase in a bank’s asset risk is, the more public capital the bank receives, then the program should mitigate a bank’s risk-shifting.

CORR98:2(PUBINJ98, V) = 0.300 < 0.555 = CORR99:2(PUBINJ99, V)

Why the 1999 Program Mitigated Banks’ Risk-Shifting?

Ex ante risky bank (high V)

Ex ante safe bank (low V)

More public capital

More decrease in leverage

Less public capital

Less decrease in leverage

The negative relationship between risk and a change in leverage

Why the Coefficient of the 1998 Program Is Positive?

44

The coefficients of the public capital injected under the 1998 program is positive, though statistically insignicant.The 1998 program may have played a role of subsidies to enable banks to make risky loans (Evidence for TARP, Duchin & Sosyura, 2010, Black & Hazelwood, 2010).Or, poorly capitalized recipients conducted forbearance lending (Peek & Rosengren, 2005, Caballero et al., 2008).

Leverage and Risk-shifting

Coefficients of cross product with V are shown.

low leverage high leverage

Limited DI 0.2916 *** 0.1339 *** (0.0726) (0.0167)

Blanket DI only 0.3300 *** 0.2785 *** (0.0504) (0.0393 )

Blanket DI + PCA 0.1609 *** 0.1066 *** (0.0505) (0.0368)

Limited DI + PCA 0.2384 ** 0.1026 *** (0.1074) (0.0279)

PUBINJ98 4.0294 8.8950 (4.7081) (5.7284)

PUBINJ99 -6.7712 ** -10.9989 *** (3.1624) (2.7274)

PUBINJOTHER -7.6773 ** 1.0975 (3.8734) (3.3682)

Leverage and Risk-shifting

• Well (poorly) capitalized observations are those whose leverage is below or equal to (above) the median in the previous period.

Leverage and Risk-shifting: Results and Interpretations

Overall, relatively well capitalized banks take a greater extent of risk-shifting than poorly capitalized banks do.

Under the pre-PCA blanket insurance regime, poorly capitalized banks accelerated risk-shifting whereas well capitalized banks did not.

Besides the regulatory arbitrage between risky and safe corporate loans under the Basel I as argued by Peek & Rosengren (2005), the blanket insurance may have induced banks’ “perverse incentives” to make riskier loans.

Loss of Observations due to the Merger Wave

Most major banks were reorganized to become subsidiaries of newly established BHCs that became listed often after a merger of multiple major banks so that subsidiary banks were delisted.

This results in fewer major banks in the sample after 2nd, FY 2000.

As of March, 2006, only 35.3% of bank assets are represented.

This may be a serious problem because most of public capital recipients were major banks.

The Regression Result Using the Sample Augmented by BHCs

Sums of the coefficient of V and the cross product are shown.

Regulatory regime leverage IPP

(risk-shifting incentive)

Limited DI -0.1117 0.2606 *** (0.1201) (0.0624)

Blanket DI only 0.0500 0.3090 *** (0.0787) (0.0367)

Blanket DI + PCA -0.5367 *** 0.1460 *** (0.1335) (0.0389)

Limited DI + PCA -0.4794 ** 0.2005 ** (0.2081) (0.0863)

Coefficients of cross product with V are shown.

The Regression Result Using the Sample Augmented by BHCs

leverage IPP

(risk-shifting incentive)

PUBINJ98 20.3539 11.3636

(17.1109) (7.1078)

PUBINJ99 -27.6032 *** -10.0269 *** (7.3212) (2.3585)

PUBINJOTHER -2.3056 -4.2534 (6.4872) (2.5140)

The Sample Augmented by Consolidated BHCs: Results and Interpretations

Many public capital recipients dropped out of the sample as they became delisted.

The results remain by and large qualitatively unaltered.

Restoring Hypothetically Consolidated Banks

We construct the data of hypothetical banks as if a new post merger bank had existed before the merger by consolidating the pre-merger data of merging banks.

The earlier methodology to add BHCs treat BHCs as new entities, resulting in the loss of continuity of the data.

For financial statement based variables, we simply add numbers for merging banks before the merger.

Restoring Hypotheticaly Consolidated Banks

The stock price of a pre-merger hypothetical bank can be restored by utilizing the share exchange ratio in each merger. It is obtained by the following formula.

21

21

eNNEES

Ei : the bank i’s shareholders’ valueNi : the bank i’s number of shares issued.e: the share exchange ratio (e shares of an bank 2 is exchanged with 1 share of bank 1)

The IPP Regression Results Using the Sample Including Hypothetically Consolidated Banks (BHCs)

54

Regulatory regime

without the cross product

with Takenaka dummy

with the cross product with

Takenaka dummy

Limited DI 0.1875 *** 0.1874 *** (0.0413) (0.0413)

Blanket DI only 0.2107 *** 0.2079 *** (0.0354) (0.0356)

Blanket DI + PCA 0.1530 *** 0.1474 *** (0.0404) (0.0411)

Limited DI + PCA 0.2295 ** 0.2632 ** (0.1015) (0.1071)

The Sample Including Hypothetically Consolidated Banks (BHCs), Contd.

55

The Financial Revival Program lead by the Finance MinisterHeizo Takenaka had some disciplinary effect.

without the cross product with

Takenaka dummy

with the cross product with

Takenaka dummy

∆VDtakenaka -0.1602 *

(0.0875) PUBINJ98 -9.7773 *** -4.7061 (3.0732) (3.2065)

PUBINJ99 -11.5349 *** -10.5898 *** (2.3802) (1.8895)

PUBINJOTHER -4.2534 ** -0.5064 (2.1018) (1.7082)

Other Robustness Tests When the franchise value as measured by the sum of

a bank’s shareholders’ value, E, and its liabilities, B, divided by the book value of a bank’s total assets was added as another variable to affect the coefficient of V, the coefficient of the cross product associated with the franchise value is negative and significant, whereas other results remain the same.

This is the evidence that banks are restrained from risk-shifting in order to preserve the franchise value.

Aggregate Trends of IPP and Leverage

Source: Authors’ calculations, Deposit Insurance Corporation of Japan

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1986

P219

87P2

1988

P219

89P2

1990

P219

91P2

1992

P219

93P2

1994

P219

95P2

1996

P219

97P2

1998

P219

99P2

0.8

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.96

0.98

1

IPP (left axis) DICJ premium (left axis) B/V (right axis)

(%)

Other Robustness Tests Use of he sample starting from 2nd or FY 1991 remain

qualitatively unaltered.

Use of public capital variables that take a positive value only when a bank receives it results in weaker but consistent results.

The cross product between a dummy variable to indicate the date of the 1999 program and V if added accompanies an insignificant coefficient so that the other macroeconomic effect of that period is not at work.

Conclusion

The blanket insurance did not accelerate banks’ risk-shifting at least in aggregate.

The PCA weakened fully insured banks’ incentives to shift their risks to the deposit insurance system.

Public capital infusions of March, 1999, under which the amounts to be injected reflected recipient banks’ needs for capital effectively disciplined them to weaken risk-shifting.

Some Modern Day Implications

Some evidence exists that TARP made loans made by banks riskier (Duchi & Sosyura, 2010; Black & Hazelwood, 2010)

Most of TARP recipients received 3% of their risk assets, the maximum amount allowed under the program.

TARP designed similarly to the 1998 program may have driven banks into moral hazard?

6161

Policy Reactions to the Global Crisis 1The Enhanced Deposit Protection

46 jurisdictions adopted some form of enhanced deposit protection during 3 month period from Sep., 2008.

A raise in the DI cap. FDIC raised the DI cap from 10 million to 25 million

(Oct., 2008) temporarily until end 2010. Later made permanent by the Financial Regulation Law (Jul., 2010)

Establishment of the DI system if it is previously non-existent.

6262

Policy Reactions to the Global Crisis 2Tougher Capital Requirements

Basel III The original draft published by BCBS in Sep. 2010. Banks are required to meet tighter capital

requirements. Requirements for the higher quality capital elements

such as common equity is added to preexisting requirements for relatively low quality elements (Tier 1/ Total capital)

Minimum standards for Tier 1 and total capital are higher.

6363

Policy Reactions to the Global Crisis 3Public Capital Infusions

TARP in the U.S. Eight of the largest US banks were first recipients Took place in October, 2008. Most banks applied and received the maximum

amount allowed under the program (the fixed proportion of risk assets)

Reportedly large capital infusions in major European countries.

Appendix: Estimating V and V

The market value of a bank’s equity can be evaluated as a call option on its assets (Black & Sholes, 1973).

0< <1 The deposit insurer does not declare a bank’s failure

and liquidate its assets immediately when the bank is found undercapitalized.

T

TB

V

x

TxBNxVNE

BFVVE

V

V

V

TT

2ln

,0max

2

64

Appendix: Estimating V and V

Solving the following non-linear system of equations including the value of the call obtained using the Ito’s lemma and another equation gives the estimates of V and v.

xVN

T

TB

Vx

TxBNxVNE

EV

V

V

V

2ln 2

V is the annualized return on a bank’s equity

65