An article in the Wall Street Journal in 2016 notes that in explaining the low stock price of the Citigroup bank: “Investors … have only to look to the bank’s return on equity. That was just 7% in the second quarter.”
a. Why would a bank’s stock price be related to its return on equity?
b. Large banks like Citigroup hold more capital relative to their assets than they did prior to the 2007–2009 financial crisis. Briefly explain the effect this change has had on banks’ return on equity, holding other factors that might affect banks’ return on equity constant.