The relationship between capital, risk, loan growth and profitability in the U.S. commercial banking: a pre-crisis study

Abstract

This study aims to re-examine the relationship between capital, risk, loan growth and profitability in the U.S. commercial banking prior to the on-going financial crisis. A simultaneous equation model is used to capture the relationship between bank capital and risk-taking behaviour, as well as bank lending and profitability. The model is estimated and tested with a simple panel estimation procedure on a sample of 5151 commercial banks and across annual observations over the 1986 to 2007 period. The study also uses alternative methodologies which include two stage least squares (2SLS) and three stage least squares (3SLS) procedures. The study also employs the GMM - Dynamic Panel Estimation to test for the robustness of the results. Overall, the study finds a negative impact of bank capital on lending, while higher capital ratios appear to positively affect bank's profitability. However, the study finds mixed results for the relationship between capital and risk-taking, having used two different measures of bank risk. Finally, there appears to be no evidence to support the conventional wisdom that better capitalized banks are more efficient.

Date of Award	2012
Original language	English
Awarding Institution	Bangor University
Supervisor	Yener Altunbas (Supervisor)