This paper documents the time-series and cross-sectional variations in bank capital ratios and investigates their underlying driving forces using listed Japanese bank data from 1977 to 2009. We derive an overall framework in the form of a present-value model to decompose the variation in bank capital ratios into changes in expected future stock returns, profitability and leverage ratios. Moreover, we use the variance decomposition approach to examine the relative importance of these factors. We find that the expected future stock returns dominate the time-series variation in bank capital ratios, and that the expected future profitability also plays an important role as the expected stock returns in the cross-sectional variation.