Solvency and Roe; Are They Conflicting Targets in Banking?

It is well known that creditors to any bank are interested in bank’s solvency, while bank’s shareholders are interested in bank’s return to equity (roe). Solvency and roe are two targets for any bank. However, solvency and roe can be under certain conditions conflicting targets. In this paper it will be shown empirically using panel data regression that in the western European banks the targets of solvency and profitability become conflicting beyond a critical point of solvency. At this critical point profitability is maximised and for any value of solvency higher than this critical level profitability declines