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The Relationship between Bank Capital, Risk-Taking and Profitability: Fresh Evidence from Panel Quantile Approach

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  • Selim Güngör

Abstract

This study aims to reveal the relationship between bank capital (BC), risk-taking, and profitability for commercial banks in Turkey using panel quantile regression models (QRPD) with non-additive fixed effects (NAFE). Accordingly, we consider the data of 18 commercial banks for 2012-2022. Firstly, we concluded a positive relationship between banks' risk-based capital (RBC) and traditional capital ratios (CR) and return on assets (ROA); in contrast there is a negative relationship between RBC and risk-weighted assets (RWATA) under all market conditions. Secondly, we found a positive relationship between the RBC and the provision for loan losses ratio (LLPTA) in other periods except for the contraction period; at the same time, there is a positive relationship between CR and LLPTA in other periods except for the expansion period. The findings also showed an inverted U-shaped relationship between RBC and the LLPTA and return on equity (ROE) and an N-shaped relationship between CR and ROE. Lastly, we discovered a positive relationship between RWATA and ROA and ROE in all market conditions, whereas a negative relationship exists between LLPTA and ROA. The findings provide valuable insights into the validity of the moral hazard and cost-skimping hypotheses, regulatory assumptions, agency, portfolio and risk-bearing profit theories in the commercial banking sector, and that risk, capital and profitability indicators are leading factors in banks' stability.

Suggested Citation

  • Selim Güngör, 2023. "The Relationship between Bank Capital, Risk-Taking and Profitability: Fresh Evidence from Panel Quantile Approach," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 8(3), pages 378-403.
    • Handle: RePEc:ahs:journl:v:8:y:2023:i:3:p:378-403
    DOI: 10.30784/epfad.1324401
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    References listed on IDEAS

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    1. Mehmet Sabri Topak & Nimet Hulya Talu, 2017. "Bank Specific and Macroeconomic Determinants of Bank Profitability: Evidence from Turkey," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 574-584.
    2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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