The Effect of Capital Ratios on the Risk, Efficiency and Profitability of Banks: Evidence from OECD Countries

59 Pages Posted: 10 Jan 2018

See all articles by Mohammad Bitar

Mohammad Bitar

Concordia University

Kuntara Pukthuanthong

University of Missouri, Columbia

Thomas John Walker

Concordia University, Quebec - Department of Finance

Date Written: January 6, 2018

Abstract

Using a sample of 1,992 banks from 39 OECD countries during the 1999–2013 period, we examine whether the imposition of higher capital ratios is effective in reducing risk and improving the efficiency and profitability of banking institutions. We demonstrate that while risk- and non-risk based capital ratios improve bank efficiency and profitability, risk-based capital ratios fail to decrease bank risk. Our results cast doubts on the validity of the weighting methodologies used for calculating risk-based capital ratios and on the efficacy of regulatory monitoring. The ineffectiveness of risk-based capital ratios with regard to bank risk is likely to be exacerbated by the adoption of the new Basel III capital guidelines. While Basel III requires banks to hold higher liquidity ratios along with higher capital ratios, our findings suggest that imposing higher capital ratios may have a negative effect on the efficiency and profitability of highly liquid banks. Our results hold across different subsamples, alternative risk, efficiency, and profitability measures and a battery of estimation techniques.

Keywords: Bank capital, Basel capital, risk, efficiency, profitability, principal component analysis, quantile regressions

JEL Classification: G21, G28, G29

Suggested Citation

Bitar, Mohammad and Pukthuanthong, Kuntara and Walker, Thomas John, The Effect of Capital Ratios on the Risk, Efficiency and Profitability of Banks: Evidence from OECD Countries (January 6, 2018). Journal of International Financial Markets, Institutions and Money, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3097554

Mohammad Bitar

Concordia University ( email )

Montreal, Québec
Canada

Kuntara Pukthuanthong (Contact Author)

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

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