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The Effect of Bank Capital Buffer on Bank Risk and Net Interest Margin: Evidence from the US

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  • Faisal Abbas
  • Shazaib Butt
  • Omar Masood
  • Kiran Javaria

Abstract

This study used a balanced panel data set of USA well, adequately, under, significantly under and critically undercapitalized large commercial banks in pre, during and post-crisis period to investigate the effect of the capital buffer, tier one capital buffer and common equity buffer on risk and net interest margin. The Generalized Method of Moment (GMM) two-step estimation was applied. The conclusions showed that the capital buffer, common equity buffer, tier one capital buffer and total risk are negatively correlated. The findings of period dummies and subgroups dummies showed that capital buffer is influencing the total risk and net interest margin differently in pre, during and post-crisis. The results indicated that the interest margin is lower in pre-crisis and during crisis period than in the post-crisis period, which signifies the impact of capital restrictions imposed by regulators in Basel-III. The outcomes showed that the influence of capital buffer on the net interest margin is not similar in all the subgroups. In addition, the results indicated that there is a positive relationship between bank risk and net interest margin. The findings also displayed that the lagged risk and current risk are positively related.

Suggested Citation

  • Faisal Abbas & Shazaib Butt & Omar Masood & Kiran Javaria, 2019. "The Effect of Bank Capital Buffer on Bank Risk and Net Interest Margin: Evidence from the US," Global Journal of Social Sciences Studies, Online Science Publishing, vol. 5(2), pages 72-87.
    • Handle: RePEc:onl:gjosss:v:5:y:2019:i:2:p:72-87:id:524
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    Citations

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    Cited by:

    1. Faisal Abbas & Zahid Irshad Younas, 2021. "How Do Bank Capital and Capital Buffer Affect Risk: Empirical Evidence from Large US Commercial Banks," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(2), pages 109-131.
    2. ABBAS Faisal, 2021. "Impact Of Investment, Financial And Trade Freedom On Bank’S Risk-Taking," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 16(3), pages 5-23, December.
    3. Faisal Abbas & Omar Masood & Shoaib Ali & Sohail Rizwan, 2021. "How Do Capital Ratios Affect Bank Risk-Taking: New Evidence From the United States," SAGE Open, , vol. 11(1), pages 21582440209, January.

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