A systematic debunking of the moralized demand that “the real economy is in difficulty, so banks should earn less — or nothing at all — and concede profits to the real economy”: first decomposing the demand into two testable questions (what is the level of bank profitability, and would earning nothing actually benefit the real economy?), then using the premise that banks are the highest-leverage sector to cross-assess with ROE and ROA dual indicators — 2018 listed bank ROE of 12.69% ranked sixth (not the highest), while ROA of approximately 0.97% ranked third from the bottom (at the tail of 29 sectors). The framework then establishes the capital adequacy ratio (within the evolving Basel Accord framework) as a hard perpetual-operation constraint, anchoring the lower bound of legitimate bank profitability: the profits earned must at minimum be sufficient to sustain the industry’s perpetual operation.
The Framework As It Stands
This section is organized from the compiled research draft: the original framework’s structure, terminology, and key expressions are preserved, including editorial bridging and externally sourced factual annotations; charts were drawn by the compiler according to the structure of the original text.
Decomposing the moral demand into testable questions
Some argue that the real economy is in difficulty, that banks should earn less or nothing at all, and that profits should be conceded to the real economy. The framework begins by breaking this demand into two factual questions: first, compared with the real economy, what level are bank profits actually at; and second, if banks genuinely earn nothing, would the real economy improve? An emotional demand can only be subject to debunking once it has been decomposed into measurable propositions. The entire framework’s chain of data follows from this.
Measurement premise: banks are the highest-leverage sector
Banks are the most distinctive sector in the entire national economy: from the perspective of shareholders’ equity versus external funds, shareholders’ money is extremely small, with all the rest coming from deposits. Capital adequacy ratio (simplified as shareholders’ equity / total liabilities) above 10% means that of every RMB 100, only a little over RMB 10 belongs to shareholders, with the rest being deposits. No other sector operates with such high liability ratios and leverage. This structure has been continuously tightened under the Basel Accord regulatory evolution framework, with each revision imposing stricter capital adequacy requirements on banks.
Therefore, assessing bank profitability requires examining two indicators simultaneously: ROE (return on equity, measuring the return on shareholder funds) and ROA (return on assets, measuring the profit rate on total funds). Relying on either indicator alone produces a misreading: looking only at ROE, banks rank sixth — which seems not low; looking only at ROA, banks rank third from the bottom.
Dual-indicator cross-assessment (2018 data)
ROE perspective: In 2018, listed bank ROE was 12.69%, ranking sixth among sub-sectors. Sectors with higher ROE in order: food and beverage, building materials, steel, home appliances, real estate. Banks are not the highest-ROE sector.
ROA perspective: China’s banking sector total assets are close to 1.8 times China’s GDP (“wealth rivaling a nation”), but from the ROA perspective, banks rank third from the bottom — ROA approximately 0.97% (2018), at the tail of 29 sectors — with sectors ranked ahead including food and beverage, building materials, steel, catering and tourism, coal, and pharmaceuticals.
Conclusion: Whether measured by ROE or ROA, bank profitability does not appear anomalously high. “Wealth rivaling a nation” (total assets ≈ 1.8× GDP) is a scale amplified by high leverage — not an elevated profit rate.
Capital adequacy ratio: the hard perpetual-operation constraint and the profit floor
Around the 1990s, the first Basel Accord took shape internationally, subsequently evolving through a second and third version, with each revision imposing more stringent and comprehensive regulatory requirements on banks — seeking after each successive crisis to close the gaps and make banks safer. Core regulatory requirement: banks must at all times maintain a capital adequacy ratio no lower than a specified level, and the quality of capital must be high (the more that comes from shareholders’ equity, the better); losses are absorbed first by shareholders’ funds, thereby curbing bank moral hazard and compelling more prudent and stable operations.
Current requirements: the six large state-owned banks minimum 11.5%, joint-stock banks minimum 10.5%; in actual practice, a buffer of approximately 1 percentage point above the minimum is needed. Maintaining a capital adequacy ratio above the regulatory standard is a necessary condition for commercial banks’ normal perpetual operation; below the minimum capital adequacy ratio, the regulator is theoretically empowered to close the bank. The criterion for assessing whether bank profitability is appropriate = the profits earned must at minimum be sufficient to sustain the industry’s perpetual operation.
Three-step framework (transferable):
- Decompose: When confronted with a moralized demand that “some sector should concede profits / is profiteering,” first break it into testable questions (what is the profit level, and would concession actually be effective?), then turn to data.
- Choose the right definition: For high-leverage sectors (banks/insurance, etc.), profit measurement cannot rely on a single indicator — ROE measures the return on shareholder funds, ROA measures the profit rate on total funds; both indicators must be used together. Scale (“wealth rivaling a nation”) is the result of leverage amplification and must not be conflated with the profit rate.
- Establish the floor: Bank profits have a lower bound determined by the capital adequacy ratio (the perpetual-operation hard constraint) — concessions cannot be made to the point of being unable to sustain perpetual operation, as that would trigger the regulatory closure threshold.
Key data anchors (2018 A-share data / regulatory values at time of lectures):
| Data | Value | Time point |
|---|---|---|
| Capital adequacy ratio (approximate shareholders’ equity / total liabilities) | Above 10% (of every RMB 100, about RMB 10-plus belongs to shareholders) | At time of lectures |
| Listed bank ROE | 12.69%, ranked sixth among sub-sectors | 2018 |
| Banking-sector total assets / GDP | Close to 1.8× (“wealth rivaling a nation”) | At time of lectures |
| Listed bank ROA | Approximately 0.97%, third from the bottom / tail of 29 sectors | 2018 |
| Current minimum capital adequacy requirement | Six large state-owned banks 11.5% / joint-stock banks 10.5% | At time of lectures |
| Operational buffer | Approximately 1 percentage point above the minimum | At time of lectures |
Compiler’s Perspective
Coordinates: Category = Banking and Real Estate / axis_h = Fa / axis_v = What It Is
Connecting layer
The implicit logic of “high bank profits = windfall profits = should concede” is: high profits → high capital efficiency → room to compress. But bank asset size (≈ 1.8× GDP) is being used as a proxy for profit rate, when the two are entirely different dimensions: scale is the result of leverage amplification, while the profit rate (ROA 0.97%) actually ranks third from the bottom among 29 sectors.
An analyst who looks only at ROE (12.69%, ranked sixth) without looking at ROA (0.97%, ranked third from the bottom) will make systematic errors in the following specific steps: interpreting the bank ROE ranking of “sixth” as “profits are elevated” and then inferring “there is room for concession” — but this ROE is generated under extreme leverage (shareholders’ equity of only just over 10%), with a return on total funds (ROA) that is at the tail of all sectors. Using both indicators together, the conclusion is: bank shareholder returns are not anomalously high, and the return on total funds ranks at the bottom of all sectors.
The exclusive claim of this framework: the capital adequacy ratio (Basel Accord constraint values: large state-owned banks 11.5%, joint-stock banks 10.5%) is not merely a technical regulatory parameter but is an objective lower-bound anchor for judging the legitimacy of bank profitability — so long as profits are insufficient to maintain the capital adequacy ratio above the regulatory line, the bank faces the legal risk of regulatory closure, and “conceding profits to the point of earning nothing” is institutionally untenable. This shares the logic of “first establish the hard constraint, then discuss the margin” with Bank Entity Liquidity Risk: The Two-Dimensional LCR and Asset-Quality Judgment, which assesses bank health from the liquidity coverage ratio perspective.
See Also
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From Microprudential to Macroprudential: The Post-Crisis Regulatory Paradigm Shift
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The Reserve System: Required Reserve Ratio and Excess Reserves
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Bank Entity Liquidity Risk: The Two-Dimensional LCR and Asset-Quality Judgment
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The Juglar Cycle: The Equipment Capex Mid-Cycle and Its ROE Essence
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Finance Value-Added as a Share of GDP: A Four-Factor Accounting Debunking
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The Capital Adequacy Identity: Three Blocked Replenishment Paths and Double Depletion
Sources
- Compiled draft z-0115 · collected 2026-07
- “External course (collected with identity removed), lecture 1.3: Wealth rivaling a nation — does total banking-sector assets equal two Chinas’ GDP?”