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The equity-to-assets ratio (EA) is also included as a measure of the overall capital strength. The ratio is a measure of capital adequacy, and should capture the general average safety and soundness of the financial institutions. A deterioration of the equity-to-assets ratio indicates either an increase in debt financing of banks? total assets (while holding total assets constant), or a decline in banks? total assets (while holding total equity constant), or both over time and space. Irrespectively, this is an increase in banks? risk, and potentially, in banks? cost-to-capital. The theory of capital structure states that a higher use of debt (equity) financing within a certain range, called the target capital structure, might actually reduce (increase) firms? cost of capital. Thus a positive (negative) coefficient estimate for equity-to-assets indicates an efficient (inefficient) management of banks? capital structure.

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