The impact of bank capital on profitability and risk in Asian banking

This article applies the Generalized Method of Moments technique for dynamic panels using bank-level data for 42 Asian countries over the period 1994 to 2008 to investigate the impacts of bank capital on profitability and risk. Ignoring influence factors, the extant literature presents an ambiguous impact of bank capital on profitability (risk), however, when the effects from the influencing factors are taken into consideration, three conclusions are reached. First, along with the change in the categories of banks, investment banks have the lowest and positive capital effect on profitability, whereas commercial banks reveal the highest reverse capital effect on risk. Second, banks in low-income countries have a higher capital effect on profitability; banks in lower-middle income countries have the highest reverse capital effect on risk, while banks in high-income countries have the lowest values. Third, banks in Middle Eastern countries own the highest and positive capital effect on profitability. Far East & Central Asian banks have the largest reverse capital effect on risk, while the lowest value occurs in Middle Eastern countries' banks. Finally, our results also reveal that persistence of profit is greatly affected by different profitability variables, and all risk variables show persistence from one year to the next. (C) 2012 Elsevier Ltd. All rights reserved.